HC Deb 12 July 1978 vol 953 cc1537-61

5.0 p.m.

Mr. Ian Stewart (Hitchin)

I beg to move amendment no. 112, in page 8, line 31, after 'and', insert 'either'.

Mr. Deputy Speaker (Mr. Bryant Godman Irvine)

With this we may take the following amendments:

No. 171, in page 8, line 33, leave out become insolvent' and insert 'defaulted in payment thereof'.

No. 113, in line 33, after 'insolvent', insert: ';or (c)(i) in the case of a company, a receiver has been appointed under the express power contained in debentures or a trust deed or by court; or (ii) in the case of an individual or body corporate, the person liable to pay the outstanding amount has entered into an arrangement with his creditors.' No. 45, in line 40, at end insert: '(a) the Inland Revenue have agreed that the outstanding amount is irrecoverable for income tax or corporation tax purposes; or'. No. 46, in line 40, at end insert: '(a) the outstanding amount is less than £1,000 and has been agreed by the Inland Revenue for the purposes of income tax or corporation tax as irrecoverable; or'. No. 172, in line 41, leave out paragraph (a) and insert: '(a) he has obtained judgment for the outstanding amount and satisfies the Commissioners that he has taken all reasonable steps to recover the amount but has not recovered it.'. No. 114, in line 41 after '(a)' insert 'in the circumstances in subsection 1 (b) of this section.' No. 115, in line 43 at end insert' 'or (aa) in the circumstances in subsection 1(c) of this section, he has provided proof to the Commissioners that a receiver has been appointed or sufficient details of the arrangement to show that he is unlikely to receive the outstanding amount within two years.'. No. 173, in page 9, line 25 leave out subsection (4).

No. 47, in line 41 at end insert 'or a receiver is appointed'. No. 174, in page 10, line 5 leave out subsection (6).

No. 116, in line 6, at end insert 'or in the circumstances in 1(c)of this section a receiver is appointed or an arrangement made' No. 117, in line 7, at end add— '(7) Where a claim has been made under this section and the Commissioners have made a refund of tax and subsequently the claimant receives money or moneys' worth from the person liable to pay for the goods or services, the claimant shall be deemed to make a taxable supply at that time equal to the amount received less the value added tax that would be payable on such taxable supply.'.

Mr. Stewart

Clause 10, to which this amendment and the other amendments in the group refer, provides relief for VAT on bad debts, but in a rather limited way. It is limited to cases of formal insolvency. This has raised the possibility that there may be some very unfortunate side effects because of the incentive to creditors to put companies into liquidation.

The purpose of the six amendments, nos. 112–117, is to provide for an alternative to formal insolvency, in the shape of receivership or arrangements with creditors. These are very technical matters, and therefore I will, if I may, say a word or two about their effect.

The amendments are intended to widen the provisions of the clause so that the regulations apply to a second class of persons, other than when the debtor is in formal insolvency, this new class being those in the hands of a receiver or where an arrangement has been made.

To do this, it is necessary to introduce a paving amendment, no. 112, at the end of subsection (1)(a), to insert the word "either". This has the effect that if the circumstances in paragraph (a) apply, and either those in paragraph (b), where a person is insolvent, or in the new paragraph (c), provided by amendment no. 113, then relief can be given.

Similarly, in subsection (2), it is necessary to provide that in addition to a person proving an insolvency, allowance is made for the situation in which receivership or a deed of arrangement occurs.

Amendment no. 114 limits the matter to cases where a person is insolvent. Amendment no. 115 introduces, at the bottom of page 8, a paragraph to deal with the receivership point. The circumstances in paragraphs (b) and (c) at the top of page 9 would then apply whether insolvency or receivership had occurred.

On page 10, subsection (6) as it stands can apply only where insolvency occurs, and therefore it is necessary to insert further words to deal with the receivership or arrangement. That is covered by amendment no. 116.

Finally, amendment no. 117 seeks to introduce a new subsection on page 10 to provide that where a claim has been made but a person subsequently recovers money, he pays part of that to Customs and Excise in the form of VAT, and in determining the rate of VAT he would be treated as making a "taxable supply" at the time when he receives the amount. Since the rate of value added tax could be different at that time from the time when the debt was originally incurred, it could be argued that the Government would lose money if that provision were not inserted.

I apologise for that rather technical introduction, but underlying this there is a very important general point. As I have said, limiting to insolvency the circumstances when VAT on bad debts can be relieved appears to us to be too narrow. In Committee, Conservative Members proposed a number of alternatives which would have widened the scope, either to make any debt which was allowable for income tax also allowable for this purpose, or where a debt was irrecoverable to the satisfaction of the Customs and Excise. Another proposal concerned the position where judgment had been entered for a debt and six months had elapsed without its being recovered. A further possibility was where the conditions for insolvency existed but a petition had not actually been presented.

These were all ways of trying to get round a point which clause 10 insists upon, that is, that for bad debt relief to be obtainable, the company should be put into liquidation. This, as many have pointed out, is naturally an incentive to creditors to pursue debtor companies into liquidation. It was objected that perhaps 8 per cent. VAT is not a very great incentive to put a company into liquidation, but very often a company in difficulties may have one very substantial creditor. This is particularly the case with small companies which supply to perhaps one major firm. Even though their overall operations may not be very large, they could easily have debts running into tens of thousands of pounds, therefore 8 per cent. of that might be better than recovering nothing, if this course were not followed. I will not repeat the technicalities that I mentioned in Committee, but I refer any hon. Members, interested in the difficulties which are put in the way of the receive, to the Official Report at columns 165 to 166.

A receiver has the ability to exclude personal liability to himself for the affairs of an ailing company, but this appears to cease once a company goes into liquidation. As the law now stands, a receiver may well be able to resist a petition for the winding-up of a company, with the support of other creditors, but it will become considerably more difficult to do so if clause 10 as it stands comes into play.

This could have important consequences for employment, because the effect of a compulsory winding-up is to terminate that company's contracts with its employees. From then on, the receiver could continue to trade only by assuming such contracts personally; therefore he would make himself liable not only for redundancy entitlement but also for claims for unfair dismissal and all the obligations of the Employment Protection Act 1975. There would be very greatly increased difficulties of sustaining a company in being in such circumstances and, indeed, of saving jobs and preserving the company's trading connections and goodwill, let alone giving it an opportunity of being nursed back to health.

The requirements of clause 10 appear to ignore the very important alternative to liquidation which is provided by receivership or moratorium, and that is a deed of arrangement in the case of an individual. This has in past years saved many hundreds of companies and individuals, from Rolls-Royce to Britten-Norman. I think it is fair to say that the principle of receivership is that a going concern has a higher value than one in a position of break-up. There are many cases, going back as far as Earls Court during the war, where businesses have run into liquidity problems and the banks have appointed a receiver, who has then been able to steer them back to profitability without going into liquidation.

The route of using receivership is used and known and, I believe, favoured in Government circles. Following our debates in Committee, I wrote to the Financial Secretary on this very point on 23rd June 1978. The practical scope and position of a receiver is particularly relevant to the options available to Government when considering proposals for assistance to companies in financial difficulties. Recent examples include West Coast Tanneries in Millom and Rivington Carpets in Bolton. In each case assistance was given to purchasers who were able then to provide the extra management and financial backing which the predecessor business had lacked. As a result, a number of jobs were saved, which would not have been the case if the receiver had ceased to trade.

When we are considering the point of cost, we have to offset the cost to the Customs and Excise of widening the scope of clause 10 against the obligations which the Government will have to assume for social security payments and other outgoings if more companies are forced into liquidation.

There was a very important letter in the Financial Times last Thursday. It was signed by the partners of five of the leading City firms of accountants. They said, among other things: For corporate debtors the clause will be destructive of asset values, productive capability and employment. In the case of private individual debtors the effect is equally regrettable. The debtor will be required to be made personally bankrupt before relief is granted and the alternative of a deed of arrangement with creditors will not qualify. Those are serious words from an authoritative source, and I hope that the Government will take the point very seriously.

Finally, I make a small point about timing. The vast majority of companies which enter into receivership pass within two or three years into liquidation, although in the meantime it may well have been possible for the receiver to preserve and to sell a viable business out of the wreck of the company. It follows that in the majority of cases the relief which is being proposed in the Bill would be paid anyway in the long run even if the clause is not to be extended to include receivers. To that extent the cost to the Revenue is only one of financing the difference in time.

Although this is a technical and complex point, I think that the principle is urgent and important. If we do not remedy this situation now, it has the potential of causing far-reaching damage.

Mr. Graham Page (Crosby)

Clause 10, which purports to give relief for bad debts, would be welcome if it really carried out that purpose, but the restrictions on the use of the clause are so great that I doubt whether it will be of any real benefit. It is restrictive because in order to prove the bad debt, the creditor has to prove that the debtor is insolvent. Further in the clause, the creditor can prove that insolvency only by showing that he has sent the individual bankrupt or has wound up the company.

Perhaps I may refer to a later clause, clause 41, without debating it but merely quoting part of it. It is a peculiar thing that when we are talking about bad debts in relation to capital gains tax, they are described in this way: the inspector is satisfied that any outstanding amount of the principal of the loan has become irrecoverable. That, of course, is the general rule in taxation in proving bad debts and having them allowed against profits. But I cannot see why there should be this great distinction between normal tax law and VAT. One knows, of course, that the Customs and Excise are laws unto themselves, as it were, but they really do not need all this protection that is given to them in the clause, as they could be otherwise satisfied that the debt is irrecoverable.

My hon. Friend the Member for Hitchin (Mr. Stewart) has, in his usual way, set forth very clearly compromise proposals—that one should go halfway and that if a receiver is appointed or if a deed of arrangement is made, that should be sufficient. With great respect to him, however, I do not see any reason why one should even go that distance in compromise. I therefore call attention to amendment no. 171, in which the insolvency could be proved merely by default. This is going straight back to the ordinary tax rules, and I hope that they will be accepted.

5.15 p.m.

Mr. Neville Trotter (Tynemouth)

I declare an interest in that I have acted as both receiver and liquidator in a number of unfortunate cases. There are, in fact, about 1,000 companies a year which end up in the hands of a receiver. They tend to be companies of a substantial nature because the debenture holder, who normally appoints, will not do so unless there are substantial assets. I believe that it would not be right to say that a receiver can normally save the company in its existing form. What he can often do is to save the business and transfer that business into more competent hands for the future. One of the effects of that, as my hon. Friend the Member for Hitchin (Mr. Stewart) said, is that employment is continued. I should have thought that that would be a consideration of great concern to the present Government.

Again, speaking with experience of these matters, I believe that my hon. Friend was absolutely right in saying that a receiver is very unwilling to continue to operate after a liquidator has been appointed because the receiver is then personally liable.

Therefore, I fully support the amendment moved by my hon. Friend and I believe, as an accountant, that all members of my profession who have experience of these matters would do the same.

Mr. Marcus Kimball (Gainsborough)

My right hon. Friend the Member for Crosby (Mr. Page) has highlighted the problem here—namely, Customs and Excise. I hate to say it, but I think that all of us in the House accept the fact that the Inland Revenue goes about its business in the most sophisticated and civilised way. Anyone who remembers the correspondence between the late A. P. Herbert and the inspector of taxes, which was carried on in verse in the columns of The Times, about a tax bill that he felt he could not or should not pay, will realise that provided one plays according to the rules of the game, the Inland Revenue carries on its business in a fairly civilised way.

However, one can hardly say the same about the Customs and Excise. Customs and Excise were set up to deal with piracy and smuggling, and they have not really got this approach out of their blood yet. I agree that in dealing with the Inland Revenue the citizens of this country probably adopt a fairly sophisticated approach. The most law abiding citizen, when faced with the Customs man, immediately believes that smuggling is almost legitimate. So perhaps there is an approach on the part of the citizen to the Customs and Excise that is different from his approach to the Inland Revenue. This is reflected in the way that the Customs and Excise go about collecting their debts.

I agree that my hon. Friend the Member for Hitchin (Mr. Stewart) has proposed a thoroughly reasonable compromise. I should like to see him being a lot more reasonable. I am very conscious of the fact that when I was an undergraduate I used to get letters from the Society for the Protection of Trade. I remember a friend of mine papering all the walls of his room with letters from that society. These were about bills from traders which were unpaid, and I should have thought that if the trader was proceeding to take the necessary steps to recover his debt by referring it to the Society for the Protection of Trade in order to collect that debt, that ought to be a sufficient reason for the Customs and Excise not to demand that the debt should be paid.

As I understand it, VAT is a tax on the invoice. It is not a tax on having sold the goods. It is not a tax on having made a profit. It is a tax on having invoiced the goods. There is nothing immoral in taking the maximum amount of credit from any trader who is mug enough to give it. Traders are extremely stupid in the way that they grant credit, and they deserve everything that is coming to them in that way. But what is totally immoral is for the Customs and Excise to take money from a person when he has not actually got it.

Parliament used to feel very strongly about no taxation without representation. I feel extremely strongly about the immorality of the Customs and Excise seizing debts and attempting to take money from someone who has not actually got it. I entirely support my hon. Friend and I wish that he had gone further with his amendment.

Mr. Pardoe

I am afraid that the hon. Member for Gainsborough (Mr. Kimball) was referring to the Inland Revenue in a previous age. I am not sure that I would draw this rigid distinction between the civilisation of the Inland Revenue and the ferocity of the Customs and Excise. Certainly the Customs and Excise earned their reputation in Cornwall in the eighteenth and nineteenth centuries. They were little better than brigands. Some of my constituents have the same view of officers of the Inland Revenue today. I fear that they may have been infected by the manners and habits of the Customs and Excise. Certainly A. P. Herbert's correspondence, civilised as it was, and even rhyming as it was, happened a long time ago. I am not entirely convinced that the Inland Revenue would know how to rhyme today.

I welcome the bad debt relief in the Bill. It always seemed crazy, to anyone looking in from outside who had not taken a detailed part in the formulation of VAT, that a man could be taxed on what he had not received. The hon. Member for Gainsborough is right. It is when one considers that it is not a tax on a sale or a tax on a receipt, that one realises that it is neither an expenditure tax nor a sales tax, but is an invoice tax.

It was for that reason that the hon. Member for Worthing (Mr. Higgins), I think, defended at some length, in the original debates way back in 1972, the principle that the Customs and Excise should be able to keep the money even though the man had never received the goods. We have to ask why a Conservative Government then, with all the advice that was available to them, decided that bad debt relief of any kind at all was impossible—and they did.

The argument is pretty strong. I must admit that at times I have even been convinced by it. But in the last few months I have managed not to be convinced by it. There is a very strong case indeed for doing what the Government have done, and I am delighted that they have done it. But the problem, which in 1972 caused the Conservative Government to do what they did is that a whole host of fiddles could creep in if one were not able to define the bad debt very narrowly indeed. It was on this point that in 1972 the argument took place. Interestingly enough, it was on this point that the Conservative Party's own discussion document on VAT and bad debt relief centred. That discussion document came to the conclusion that it would have to be a bad debt proved by insolvency which would be relieved and that if one went wider than that, all these various fiddles would creep in.

I am convinced by that Conservative Party discussion document. The Inland Revenue appears to have been convinced by it, and the Government appear to have been convinced by it. I think that the clause as it stands in the Bill is a great advance on the VAT which we had before. I wholeheartedly welcome it. I do not think that we should go down the road of these amendments, because there are a host of things which unseemly characters will be able to do. Some hon. Members may actually welcome that because it would ensure that the taxpayer got even with Customs and Excise. I might even be fairly sympathetic to that view, but I do not think that we should do this. Instead, I believe that we should accept the bad debt relief as provided for in the Bill.

Mr. John Wakeham (Maldon)

While I welcome the relief from VAT given for bad debts in this clause, I must say that there are aspects of the clause which make me more unhappy than virtually any other aspect of this Finance Bill. I cannot see what sense there is in making a man bankrupt when there is no money to be obtained. This seems to be entirely out of spirit with the times. Unless there can be a very good reason for it, I am not at all satisfied. The same applies to liquidations. What sense is there in liquidation when there are no assets to arrive at?

If there had not been well established over a long time—I do not accept that this will result in a great many fiddles—a perfectly satisfactory system for dealing with bad debts in our income tax and corporation tax legislation, which could be perfectly well used in this particular case, I would then accept that there could be an argument in favour of what the Government propose. However, we have a precedent which is perfectly satisfactory.

Indeed, I looked up the position under the old purchase tax arrangements, because a great deal of what is contained in VAT legislation has sprung from purchase tax. So far as I can discover, it is quite clear that in purchase tax there was no statutory provision for bad debts. But an extra-statutory concession was available. From researches that I have made over the last 24 hours, I know that there are known examples of extra-statutory concessions which would have been far less restrictive than the arrangements for VAT made statutorily under this clause.

Mr. David Mitchell (Basingstoke)

In those extra-statutory arrangements which in practice exist, would my hon. Friend include the practice which goes on in a number of companies which, when they see a bad debt coming, issue a credit note so that no VAT becomes liable on transactions? Since I understand that that is fairly widespread, I do not know whether the Minister intends to condone it by putting into law or whether my hon. Friend includes it in the extra-statutory arrangements.

Mr. Wakeham

As far as I understand it, the position is that a credit note, which is put through the books purely in order to get VAT back in this fashion, would not be a valid transaction. I think that a credit note, which is an adjustment of the invoice price arrived at in circumstances to assist the debtor and so on, would be legitimate. That is obviously a way in which some people have quite properly dealt with this problem. But the area between what is allowed and what is not allowed is narrow, although it is quite clear. I certainly would not condone a system whereby artificial transactions were put through. Everyone faced with this situation ought to take proper advice as to what arrangements he can legitimately make. Therefore, I condemn these very restrictive proposals, not only because they do not compare well with income tax but because in practice they do not even compare with what was available under the old purchase tax arrangements.

When he replied in Committee, the Minister used as his principal argument the question of cost. He said that under the concessions in the Bill it would cost £35 million and that if he were to concede what we had asked for it would cost £100 million. While I know that the Financial Secretary would not have worked out these figures himself, and that he has to accept a great deal of what is given to him, I believe that we ought to look for a minute at the implications of what he is saying, because I find that it strains my credibility to the utmost.

He is saying that there would be an extra £65 million of concessions. When we are talking about an 8 per cent. VAT, it is not a very complicated sum to work out that that represents £800 million of outstanding debt upon which some relief on VAT would be obtained because it is a bad debt. Is the Minister saying that people are unlikely to claim these debts by putting companies into receivership or making debtors bankrupt? Is he saying that these debts will be written off and that this particular relief will not have to be given by the Revenue? I find that figure incredible, and I would be grateful if the Minister could give me a further explanation as to how it was arrived at.

There are one or two practical points which have not yet been covered. We have already made the valuable and significant point with regard to receivership and the effect on employment. The same point can be made in relation to the ability to organise a moratorium in appropriate cases. In many companies many difficult situations are dealt with by unofficial moratoria of one sort or another. These, too, will be thrown into great difficulty by this legislation where this relief is available only in cases of bankruptcy.

Thirdly, there is also the question of the additional work which will arise in the Official Receiver's office. In particular, I wonder whether the Minister can give us some explanation as to the effect on companies which are struck off under section 353 of the Companies Act. Many of these companies are struck off because they are defunct or because there is no point in pursuing debts of one sort or another. For example, in 1976, 28,296 companies were struck off in this way. Many of them were defunct and many of them had debts outstanding which no one was bothering to pursue. In the same year the Official Receiver was appointed a liquidator in respect of only 1,906 of those companies.

How many more companies will now have to go through compulsory liquidation, which will fall upon the Official Receiver and produce additional costs which will fall on the public Exchequer, because someone is now pressing to wind up a company in order to register a debt as a bad debt which is already known to be a bad debt? Indeed, one might ask the Financial Secretary what will happen to companies which are struck off under section 353 of the Companies Act anyway. Will people be allowed to get relief for debts against a company which has been struck off in that way? I do not think that the legislation covers that.

5.30 p.m.

I accept the principle of granting bad debts relief for VAT. I think that the Government ought to look again at the terms and conditions, which clearly are very unsatisfactory. If they do not look at them again fairly quickly, my guess is that they will be forced to do so, because the first time that they encounter a receivership in respect of an industry which is politically and socially important, the unsecured creditors will press the Government hard, knowing the difficulties which the receiver will be put into, to get some sort of satisfactory solution.

The Government are not facing the reality of what they are doing by leaving this amendment to the law in such an unsatisfactory state. If they do not do it now, they will be forced into doing it when it will be much inconvenient for them. They should face the logic of what they are proposing in giving bad debt relief in the first place by doing the job in a proper and equitable manner.

Mr. Robert Sheldon

This debate, inaugurated by the amendment moved by the hon. Member for Hitchin (Mr. Stewart), has concerned itself substantially with the effect of bad debt relief on firms which finding themselves in trouble, might be more liable to be put into liquidation than into receivership. I am aware that receivership is held by many people to offer the best chance for recovery of bad debts.

Clause 10 was introduced following representations made last year and the subsequent debates on the Finance Bill. It allows bad debt relief only in cases where the debtor has been declared bankrupt or where the company is being wound up. We have made it clear that there would be problems about extending the relief further than that.

This amendment seeks to provide extension of this relief. Amendment no.

112 and those amendments grouped with it extend the relief to all cases where the debtor enters into an arrangement of some kind with the supplier. Amendment no. 117 proposes that where the debtor is in receivership or where there is an arrangement, the creditor who gets bad debt relief should repay the VAT element of the relief he has received in any subsequent dividend. Obviously this is based on a tax-inclusive system of claims on the debtor.

I note the examples which were put forward by the hon. Member for Hitchin. Any decision to press for winding up of a company is bound to result from a mixture of different motives. Part of the mixture is bound to be a basic commercial judgment about the possibility of reviving the business; if there is any hope, it will always be the intention of the creditors to assist as much as they can without compromising their own financial position. However, in cases where there can be no possibility of the business continuing in its existing form, it will be argued that a successful receivership offers the best opportunity for the continued existence of the company. These major decisions will continue to be taken in the way in which they are normally taken now. But it will be argued that because of the 8 per cent. VAT element given in clause 10 it might be marginally better to press for liquidation in order to get a slightly larger dividend than would otherwise be available.

In Committee, the hon. Member for Cornwall, North (Mr. Pardoe) pointed out that the 8 per cent. was a marginal increase and that there was the added risk of losing potentially larger dividends, and I do not think that there was any incontrovertible argument against that.

The major factor in constructing a bad debt relief scheme—and it is one of which we have to take account, because we are dealing with about 12,000 liquidations a year—was that we needed a simple form to administer so that those who wanted to get bad debt relief would not have an immensely complicated task to obtain that relief, perhaps resulting in more than the midnight hours that we heard of in an earlier amendment. A simple scheme would cut out a great deal of work and effort not only by those claiming the relief but also by the liquidators or receivers concerned, and the Customs and Excise, too.

What we have proposed is essentially a very simple scheme with little formality and little delay in payment. The scheme works on the principle that the claim by a creditor to the liquidator is to be for a tax-exclusive amount of debt, with the full refund coming from Customs and Excise by way of the value added tax on the debt itself. The refund is obtained very easily by entering a credit on the very next VAT return. If the creditor receives a dividend, nothing needs to be paid to Customs and Excise because the original claim itself was tax-exclusive. We were pleased that at least on this aspect of the value added tax we had achieved a worthwhile simplicity of operation which could deal readily with a large number of potential claims.

It would be possible, of course, to have tax-inclusive schemes, because the dividends will be low under a liquidation and the Treasury might therefore be able to forgo the VAT element in such dividends. But the dividends available in receiverships and the dividends available in arrangements may be much higher than in liquidations. Therefore, in a tax-inclusive scheme, repayment of the VAT element of dividends would be required of the trader.

If we include voluntary arrangements by debtors and their creditors, not only do we have the financial disadvantages to which I have just referred but we are also deprived of certain basic checks in the scheme. These checks were adverted to by the hon. Member for Cornwall, North, when lie pointed out the possibility of collusion. In a deed of arrangement, which can be just a number of individuals getting together to agree about the nature of the debt itself, these difficulties can arise.

So we had to have a scheme which retained some simplicity. Without it, we have to come up with an entirely new scheme to take account of these problems.

The fact that a receiver has been appointed to a company does not mean necessarily that all its debts will turn out to be bad. The receivership may be a success, and then, for the purposes of granting relief, it would be necessary to define what exactly constitutes a bad debt. Creditors would then qualify for the relief only to the extent that that debt fell within that definition.

In a similar way, entry into an arrangement does not necessarily imply that ultimately there will be any bad debts. Following a moratorium, of course, the debt could be repaid in full. An interim dividend payable under an arrangement may be succeeded in time by further dividends or even by the entire debt being recovered. In those circumstances, substantial sums of public money would have been paid out unnecessarily.

It is quite impossible to extend the present proposals to include only receiverships and arrangements. There are other forms of arrangements which would have to be monitored and which cannot be defined satisfactorily.

We then face the alternative of comprehensive relief, to which I am much attracted. It would provide for the repayment of value added tax in any bad debt. As I mentioned in Committee, the difficulty is the cost of such a scheme—it could be a further £60 million—and we would also be denying those who wished to make claims for bad debt relief the essential simplicity to which I have referred.

I turn to amendment no. 113. This does not define an arrangement, and it would apply not only to compositions under the Companies Act but also to informal arrangements—moratoria and so on—which tend to be far more prevalent. Indeed, it could be argued that acceptance of any bad debt by a creditor is tantamount to an arrangement. If the creditor says that he calls this debt a bad one, then there is little to distinguish that statement from an arrangement, as it is normally defined. It would be administratively costly and quite impractical for the commissioners to satisfy themselves in advance in each such case about the condition in amendment no. 113, that the creditor is unlikely to receive the outstanding amount within two years. For the Inland Revenue to make a qualitative judgment of that kind does not provide the basis for satisfactory legislation.

Mr. Wakeham

Does the Financial Secretary agree that the Inland Revenue does make that judgment now for income tax purposes? Why cannot Customs and Excise do the same thing?

Mr. Sheldon

In this case we shall be making disbursements of public money, and asking for an analysis of a kind that Customs and Excise are not fitted to do. This would require immense administrative effort, and there would be serious difficulty in ensuring that the VAT element in any ultimate dividend was refunded. The position for VAT is not comparable with that for direct taxation because in the latter case the amounts recovered are automatically included in the taxable profits for the financial year in which they are recovered.

Finally, the wording of the amendment is such that it could be interpreted as covering receiverships and arrangements already in existence, and would so increase the cost of the relief.

Amendment no. 45 proposes that, in addition to the formal insolvency criterion, relief should be given provided that the Inland Revenue agree that a debt is irrecoverable for income or corporation tax purposes. The amendment would introduce even further complications where the debtor was declared insolvent because the supplier could either defer his claim until the Inland Revenue had agreed that the debt was irrecoverable, or, if he wished to obtain the relief earlier, try to prove that this was an insolvency case and claim for the tax exclusive amount of the debt. There would be two choices open to him. Depending upon which course the supplier used, his claim on the debtor could be either on a tax exclusive or a tax inclusive basis. The confusion that this would cause among traders and those responsible for administration would be almost insuperable.

Amendment no. 46 looks attractive on the face of it because it deals with non-insolvency debts not exceeding £1,000. It has some of the appearance, if not the reality, of a de minimis provision. In fact, of course, the amendment would have the same disadvantages of amendment no. 45 in its administrative effect. Amendment no. 47 covers the same points as amendment no. 112.

I deal now with amendments nos. 171 to 174, and the arguments put by the right hon. Member for Crosby (Mr. Page). Here the test for relief is obtaining a judgment, and after that satisfying the commissioners that the creditor has taken all reasonable steps to recover the amount. The problem here is that many more claims could be made on this basis. Then, of course, there is the problem of past debt and the distinction between old and irrecoverable debt.

The House must decide which of the two paths we should go along. We have produced in clause 10 a simple scheme that has the attractions of a trader being able to obtain a refund of the VAT which he has been called upon to pay. This can be done very simply, very easily and at reasonable cost. The other alternative is to produce a comprehensive scheme—expensive, very complicated and needing a much greater administrative effort by Customs and Excise, but meeting most of the arguments put forward by hon. Members who have contributed to the debate.

What we have done is to produce a first step with which I think we should be satisfied at this stage. I take serious note of the argument about the fears about companies going into liquidation. I think that these fears have been exaggerated, but I have listened to the arguments and I do not deny that there might be some effect in this direction. Therefore, I propose to ask Customs and Excise to monitor very closely the effect of clause 10 in practice and I shall see that they maintain close contact with bodies which specialise in receiverships so that they can learn quickly whether the clause were to affect them in the way suggested. We would stand ready to take action if this appeared to be necessary.

Mr. Graham Page

What about the case of a company which is struck off without there being a creditors' voluntary winding up or even a court order in some cases? Surely there would have to be some extra statutory concession in such a case.

Mr. Sheldon

Most companies that are struck off are struck off because there are no trading records. It does not affect the question of liquidation as a rule. If there were problems, we could deal with them in the way that the right hon. Gentleman suggests.

5.45 p.m.

Mr. Peter Rees (Dover and Deal)

I sense that the Financial Secretary is a little uncertain and uneasy about his position. He has conceded that the Customs and Excise will need to monitor very carefully the clause if it is enacted unamended. I suspect that if he were pressed he would recognise that there is considerable force in our arguments deployed in the course of this short but very useful debate.

We are appreciative that the Government have taken on board at last, in deference to representations, many of them made in the course of debates over the past few years, that there should be relief for bad debts in VAT. The Financial Secretary has commended clause 10 on the basis that the scheme proposed is cheap and simple. But if the principle that there should be relief for bad debts is acceptable, I do not believe that the question of costs should weigh with us unduly. It would be wrong to say that we accept the principle to a degree but that we will circumscribe it to meet some preordained budget. Either one believes in the general principle of relief for bad debt or one does not.

I was particularly impressed by the arguments of my hon. Friend the Member for Maldon (Mr. Wakeham) who demonstrated that there cannot be as much of a discrepancy as that between £35 million and £100 million—the figures given upstairs. Indeed, the Financial Secretary was bound to concede that those figures are based at best on inspired guesswork. I do not attach too much weight to them.

Therefore, the Financial Secretary is forced back on to the argument of simplicity. He says that insolvency is precise, it is easily understood and can be determined as a matter of law. Also there will be no difficulty with Customs and Excise or for the registered trader. One would concede that simplicity is important in a way, but I do not see that the various alternative proposals which have been embodied in the amendments debated this afternoon also lack simplicity. Also that simplicity which the Financial Secretary prays in aid is of such a narrow kind that, as he is bound to admit, a great number of bad debts, on any normal commercial use of the term, will be excluded.

As has been pointed out in a great number of very able and lucid speeches from this side of the House, the consequences of clause 10 if unamended will be extremely unattractive, if not to say impracticable. The Financial Secretary was bound to concede that, since he has said that he will instruct the Customs and Excise to monitor the consequences of this clause if it is passed unamended.

I do not want to go over the ground covered so admirably by my right hon. and hon. Friends. I understand that the Financial Secretary is constitutionally responsible for both the Inland Revenue and the Customs and Excise, but he does not seem to know what his right hand or his left hand are doing, because the Inland Revenue has managed to operate a had debt relief scheme of the simplest possible sort for many years. It has been in operation since about 1847 and has not occasioned the Inland Revenue or the taxpayer many problems.

I do not seek to draw any distinction between the benevolence and competence of the Inland Revenue and the Customs and Excise. I leave that to the hon. Member for Cornwall, North (Mr. Pardoe) who evidently has a closer acquaintance with pirates than I have, though I also represent a coastal seat. I do not want to get involved in interdepartmental or inter-constituency rivalries.

I credit the Customs and Excise with as much experience, competence and benevolence as has the Inland Revenue. The hon. Member for Cornwall, North described all tax gatherers as publicans and sinners, but I am prepared to credit both arms of the service with the same qualities. I do not believe that those in the Customs and Excise fall short of the qualities of their bretheren in the Inland Revenue and I believe that they would easily be able to operate a system of relief based on the principles that have long been accepted by the Commissioners of Inland Revenue.

In an endeavour to meet the arguments of the Financial Secretary, although we are not over-impressed with them in Committee, we put down a variety of amendments based on receiverships, moratoria and other such matters. Had the right hon. Gentleman shown any disposition to meet us on those matters or, in the words of his right hon. Friend the Minister of State, to give an undertaking to introduce comparable amendments in the next Finance Bill, I would have counselled my colleagues not to press any of our amendments to a Division.

The Financial Secretary said that he had moved a step forward, but it was the faultering, half-step that he has moved so often, and I do not believe that he has taken on board the extremely cogent arguments of my right hon. and hon. Friends against clause 10. We have pointed out the extremely unattractive consequences, the problems over the number of insolvencies and redundancy payments and all the complications involving companies that have been struck off under section 353.

In order to mark our disapproval of the Government's point of view and to inject a note of urgency into our debates and into the monitoring activities of the Customs and Excise, we should go back to the Inland Revenue position which is

best set out in amendment no. 171. I therefore urge my hon. Friend the Member for Hitchin (Mr. Stewart), notwithstanding the elegance and eloquence with which he moved amendment no. 112, to withdraw it and to allow my right hon. Friend the Member for Crosby (Mr. Page) to press amendment no. 171 to a Division.

Mr. Ian Stewart

I cannot resist an invitation put in such terms and, in order to make way for my right hon. Friend the Member for Crosby (Mr. Page), I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment proposed: No. 171, in page 8, line 33, leave out 'become insolvent' and insert 'defaulted in payment thereof'.—[Mr. Graham Page.]

Question put, That the amendment be made:—

The House divided: Ayes 247, Noes 284.

Division No. 261] AYES [5.55 p.m.
Adley, Robert Crouch, David Hampson, Dr Keith
Aitken, Jonathan Crowder, F. P. Hannam, John
Alison, Michael Davies, Rt Hon J. (Knutsfprd) Harrison, Col Sir Harwood (Eye)
Amery, Rt Hon Julian Dean, Paul (N Somerset) Harvie Anderson, Rt Hon Miss
Arnold, Tom Dodsworth, Geoffrey Haselhurst, Alan
Atkins, Rt Hon H. (Spelthorne) Douglas-Hamilton, Lord James Hastings, Stephen
Atkinson, David (B'mouth, East) Drayson, Burnaby Havers, Rt Hon Sir Michael
Awdry, Daniel du Cann, Rt Hon Edward Hawkins, Paul
Baker, Kenneth Durant, Tony Hayhoe, Barney
Banks, Robert Eden, Rt Hon Sir John Heath, Rt Hon Edward
Bell, Ronald Edwards, Nicholas (Pembroke) Hicks, Robert
Bennett, Sir Frederic (Torbay) Elliott, Sir William Higgins, Terence L.
Bennett, Dr Reginald (Fareham) Emery, Peter Hodgson, Robin
Benyon, W. Eyre, Reginald Holland, Philip
Berry, Hon Anthony Fairbairn, Nicholas Hordern, Peter
Biffen, John Fairgrieve, Russell Howe, Rt Hon Sir Geoffrey
Biggs-Davison, John Farr, John Howell, David (Guildford)
Blaker, Peter Fell, Anthony Howell, Ralph (North Norfolk)
Body, Richard Finsberg, Geoffrey Hunt, David (Wirral)
Boscawen, Hon Robert Fisher, Sir Nigel Hunt, John (Ravensbourne)
Bottomley, Peter Fletcher, Alex (Edinburgh N) Hurd, Douglas
Bowden, A. (Brighton, Kemptown) Fletcher-Cooke, Charles Hutchison, Michael Clark
Braine, Sir Bernard Forman, Nigel Irving, Charles (Cheltenham)
Brittan, Leon Fox, Marcus James, David
Brocklebank-Fowler, C. Fraser, Rt Hon H. (Stafford & St) Jenkin, Rt Hon P. (Wanst'd & W'df'd)
Brooke, Hon Peter Galbraith, Hon T. G. D. Jessel, Toby
Brotherton, Michael Gardiner, George (Reigate) Jones, Arthur (Daventry)
Brown, Sir Edward (Bath) Gardner, Edward (S Fylde) Jopling, Michael
Bryan, Sir Paul Gilmour, Rt Hon Sir Ian (Chesham) Joseph, Rt Hon Sir Keith
Buchanan-Smith, Alick Gilmour, Sir John (East Fife) Kaberry, Sir Donald
Buck, Antony Glyn, Dr Alan Kershaw, Anthony
Budgen, Nick Godber, Rt Hon Joseph Kimball, Marcus
Bulmer, Esmond Goodhart, Philip King, Evelyn (South Dorset)
Butler, Adam (Bosworth) Goodlad, Alastair King, Tom (Bridgwater)
Chalker, Mrs Lynda Gorst, John Knight, Mrs Jill
Channon, Paul Gow, Ian (Eastbourne) Knox, David
Clark, Alan (Plymouth, Sutton) Gower, Sir Raymond (Barry) Lamont, Norman
Clark, William (Croydon S) Grant, Anthony (Harrow C) Langford-Holt, Sir John
Clarke, Kenneth (Rushcliffe) Gray, Hamish Lawrence, Ivan
Cockcroft, John Grieve, Percy Lawson, Nigel
Cooke, Robert (Bristol W) Griffiths, Eldon Lester, Jim (Beeston)
Cope, John Grylls, Michael Lewis, Kenneth (Rutland)
Cormack, Patrick Hall-Davis, A. G. F Lloyd, Ian
Corrie, John Hamilton, Archibald (Epsom & Ewell) Loveridge, John
Costain, A. P. Hamilton, Michael (Salisbury) Luce, Richard
McAdden, Sir Stephen Page, John (Harrow West) Spence, John
McCrindle, Robert Page, Rt Hon R. Graham (Crosby) Spicer, Jim (W Dorset)
Macfarlane, Neil Page, Richard (Workington) Spicer, Michael (S Worcester)
MacGregor, John Parkinson, Cecil Sproat, Iain
MacKay, Andrew (Stechford) Percival, Ian Stainton, Keith
Macmillan, Rt Hon M. (Farnham) Peyton, Rt Hon John Stanbrook, Ivor
McNair-Wilson, M. (Newbury) Pink, R. Bonner Stanley, John
McNair-Wilson, P. (New Forest) Prentice, Rt Hon Reg Steen, Anthony (Wavertree)
Madel, David Price, David (Eastleigh) Stewart, Ian (Hitchin)
Marshall, Michael (Arundel) Pym, Rt Hon Francis Stradling Thomas, J.
Marten, Nell Raison, Timothy Tapsell, Peter
Mather, Carol Rathbone, Tim Taylor, R. (Croydon NW)
Maude, Angus Rees, Peter (Dover & Deal) Taylor, Teddy (Cathcart)
Maudling, Rt Hon Reginald Rees-Davies, W. R. Tebbit, Norman
Maxwell-Hyslop, Robin Renton, Rt Hon Sir D. (Hunts) Thomas, Rt Hon P. (Hendon S)
Mayhew, Patrick Renton, Tim (Mid-Sussex) Townsend, Cyril D.
Meyer, Sir Anthony Rhodes James, R. Trotter, Neville
Miller, Hal (Bromsgrove) Rhys Williams, Sir Brandon Vaughan, Dr Gerard
Mills, Peter Ridley, Hon Nicholas Viggers, Peter
Miscampbell, Norman Ridsdale, Julian Wakeham, John
Mitchell, David (Basingstoke) Rifkind, Malcolm Walder, David (Clitheroe)
Moate, Roger Roberts, Wyn (Conway) Walker-Smith, Rt Hon Sir Derek
Monro, Hector Rossi, Hugh (Hornsey) Wall, Patrick
Moore, John (Croydon C) Rost, Peter (SE Derbyshire) Walters, Dennis
More, Jasper (Ludlow) Royle, Sir Anthony Warren, Kenneth
Morgan, Geraint St. John-Stevas, Norman Weatherill, Bernard
Morgan-Giles, Rear-Admiral Scott, Nicholas Wells, John
Morris, Michael (Northampton S) Scott-Hopkins, James Whitelaw, Rt Hon William
Morrison, Charles (Devizes) Shaw, Giles (Pudsey) Whitney, Raymond
Neave, Airey Shaw, Michael (Scarborough) Wiggin, Jerry
Nelson, Anthony Shelton, William (Streatham) Winterton, Nicholas
Neubert, Michael Shepherd, Colin Wood, Rt Hon Richard
Newton, Tony Shersby, Michael Young, Sir G. (Ealing, Acton)
Normanton, Tom Silvester, Fred Younger, Hon George
Nott, John Sims, Roger
Onslow, Cranley Sinclair, Sir George TELLERS FOR THE AYES:
Oppenheim, Mrs Sally Skeet, T. H. H. Mr. Spencer Le Marchant and
Osborn, John Smith, Timothy John (Ashfield) Mr. Peter Morrison.
Abse, Leo Cox, Thomas (Tooting) Flannery, Martin
Allaun, Frank Craigen, Jim (Maryhill) Fletcher, Ted (Darlington)
Anderson, Donald Crawford, Douglas Foot, Rt Hon Michael
Archer, Rt Hon Peter Crawshaw, Richard Ford, Ben
Armstrong, Ernest Cronin, John Fowler, Gerald (The Wrekin)
Ashton, Joe Crowther, Stan (Rotherham) Fraser, John (Lambeth, N'w'd)
Atkins, Ronald (Preston N) Cryer, Bob Freeson, Rt Hon Reginald
Atkinson, Norman (H'gey, Tott'ham) Cunningham, G. (Islington S) Garrett, John (Norwich S)
Bagier, Gordon A. T. Cunningham, Dr J. (Whiteh) Garrett. W. E. (Wallsend)
Bain, Mrs Margaret Dalyell, Tam George, Bruce
Barnett, Guy (Greenwich) Davidson, Arthur Ginsburg, David
Barnett, Rt Hon Joel (Heywood) Davies, Bryan (Enfield N) Golding, John
Bates, Alf Davies, Rt Hon Denzil Gould, Bryan
Bean, R. E. Davies, Ifor (Gower) Gourlay, Harry
Beith, A. J. Davis, Clinton (Hackney C) Grant, John (Islington C)
Benn, Rt Hon Anthony Wedgwood Deakins, Eric Grimond, Rt Hon J.
Bidwell, Sydney Dean, Joseph (Leeds West) Grocott, Bruce
Bishop, Rt Hon Edward de Freitas, Rt Hon Sir Geoffrey Hamilton, James (Bothwell)
Blenkinsop, Arthur Dell, Rt Hon Edmund Hamilton, W. W. (Central Fife)
Booth, Rt Hon Albert Dempsey, James Hardy, Peter
Boothroyd, Miss Betty Dewar, Donald Harrison, Rt Hon Walter
Bottomley, Rt Hon Arthur Doig, Peter Hart, Rt Hon Judith
Boyden, James (Bish Auck) Dormand, J. D. Hattersley, Rt Hon Roy
Bradley, Tom Douglas-Mann, Bruce Hayman, Mrs Helene
Bray, Dr Jeremy Duffy, A. E. P. Healey, Rt Hon Denis
Brown, Hugh D. (Provan) Dunn, James A. Heffer, Eric S.
Brown, Robert C. (Newcastle W) Dunnett, Jack Henderson, Douglas
Brown, Ronald (Hackney S) Dunwoody, Mrs Gwyneth Hooley, Frank
Buchan, Norman Eadie, Alex Horam, John
Buchanan, Richard Edge, Geoff Howell, Rt Hon Denis (B'ham, Sm H)
Callaghan, Jim (Middleton & P) Edwards, Robert (Wolv SE) Hoyle, Doug (Nelson)
Campbell, Ian Ellis, John (Brigg & Scun) Huckfield, Les
Canavan, Dennis Ellis, Tom (Wrexham) Hughes, Mark (Durham)
Carmichael, Nell English, Michael Hughes, Robert (Aberdeen N)
Carter-Jones, Lewis Evans, Fred (Caerphilly) Hughes, Roy (Newport)
Cartwright, John Evans, Gwynfor (Carmarthen) Hunter, Adam
Castle, Rt Hon Barbara Evans, Ioan (Aberdare) Irvine, Rt Hon Sir A. (Edge Hill)
Clemitson, Ivor Evans, John (Newton) Irving, Rt Hon S. (Dartford)
Cocks, Rt Hon Michael (Bristol S) Ewing, Harry (Stirling) Jackson, Miss Margaret (Lincoln)
Cohen, Stanley Ewing, Mrs Winifred (Moray) Janner, Greville
Cook, Robin F. (Edin C) Faulds, Andrew Jay, Rt Hon Douglas
Corbett, Robin Fernyhough, Rt Hon E. Jeger, Mrs Lena
Cowans, Harry Fitch, Alan (Wigan) Jenkins, Hugh (Putney)
John Brynmor Newens, Stanley Spriggs, Leslie
Johnson, James (Hull West) Noble, Mike Stallard, A. W.
Johnson, Walter (Derby S) Oakes, Gordon Steel, Rt Hon David
Jones, Alec (Rhondda) Ogden, Eric Stewart, Rt Hon Donald
Jones, Dan (Burnley) O'Halloran, Michael Stewart, Rt Hon M. (Fulham)
Judd, Frank Orbach, Maurice Stoddart, David
Kaufman, Rt Hon Gerald Ovenden, John Strang, Gavin
Kelley, Richard Owen, Rt Hon Dr David Summerskill, Hon Dr Shirley
Kerr, Russell Padley, Walter Swain, Thomas
Kilroy-Silk, Robert Palmer, Arthur Taylor, Mrs Ann (Solton W)
Kinnock, Neil Pardoe, John Thomas, Dafydd (Merioneth)
Lambie, David Park, George Thomas, Jeffrey (Abertillery)
Lamond, James Parker, John Thomas, Mike (Newcastle E)
Latham, Arthur (Paddington) Parry, Robert Thomas, Ron (Bristol NW)
Leadbitter, Ted Pavitt, Laurie Thompson, George
Lee, John Pendry, Tom Thorne, Stan (Preston South)
Lestor, Miss John (Elton & Slough) Perry, Ernest Thorpe, Rt Hon Jeremy (N Devon)
Lever, Rt Hon Harold Phipps, Dr Colin Tierney, Sydney
Lewis, Ron (Carlisle) Prescott, John Tilley, John
Litterick, Tom Price, C. (Lewisham W) Tinn, James
Loyden, Eddie Price, William (Rugby) Tomlinson, John
Luard, Evan Radice, Giles Tomney, Frank
Lyon, Alexander (York) Rees, Rt Hon Merlyn (Leeds S) Torney, Tom
Mabon, Rt Hon Dr J. Dickson Reid, George Tuck, Raphael
McCartney, Hugh Richardson, Miss Jo Urwin, T. W.
MacCormick, Iain Roberts, Albert (Normanton) Varley, Rt Hon Eric G.
McDonald, Dr Oonagh Roberts, Gwilym (Cannock) Wainwright, Richard (Colne V)
McElhone, Frank Robertson, George (Hamilton) Walker, Harold (Doncaster)
MacFarquhar, Roderick Robinson, Geoffrey Walker, Terry (Kingswood)
McGuire, Michael (Ince) Roderick, Caerwyn Watkins, David
MacKenzie, Rt Hon Gregor Rodgers, George (Chorley) Watkinson, John
Maclennan, Robert Rodgers, Rt Hon William (Stockton) Watt, Hamish
McMillan, Tom (Glasgow C) Rooker, J. W. Weetch, Ken
McNamara, Kevin Roper, John Weitzman, David
Madden, Max Rose, Paul B. White, Frank R. (Bury)
Magee, Bryan Ross, Stephen (Isle of Wight) White, James (Pollok)
Mallalieu, J. P. W. Ross, Rt Hon W. (Kilmarnock) Whitehead, Phillip
Marshall, Dr Edmund (Goole) Rowlands, Ted Whitlock, William
Marshall, Jim (Leicester S) Ryman, John Wigley, Dafydd
Maynard, Miss Joan Sandelson, Neville Willey, Rt Hon Frederick
Meacher, Michael Sedgemore, Brian Williams, Rt Hon Alan 'Swansea W)
Mellish, Rt Hon Robert Selby, Harry Williams, Sir Thomas (Warrington)
Mikardo, Ian Sever, John Wilson, Gordon (Dundee F.)
Millan, Rt Hon Bruce Shaw, Arnold (llford South) Wilson, Rt Hon Sir Harold (Huyton)
Miller, Dr M. S. (E Kilbride) Sheldon, Rt Hon Robert Wilson, William (Coventry SE)
Mitchell, Austin (Grimsby) Shore, Rt Hon Peter Wise, Mrs Audrey
Mitchell, R. C. (Soton, Itchen) Short, Mrs Renée (Wolv NE) Woof, Robert
Molloy, William Silkin, Rt Hon John (Deptford) Wrigglesworth, Ian
Moonman, Eric Silverman, Julius Young, David (Bolton E)
Morris, Alfred (Wythenshawe) Skinner, Dennis
Morris, Rt Hon Charles R. Smith, Rt. Hon. John (N Lanarkshire) TELLERS FOR THE NOES:
Morris, Rt Hon J. (Aberavon) Snape, Peter Mr. Donald Coleman and
Moyle, Rt Hon Roland Spearing, Nigel Mr. Ted Graham.

Question accordingly negatived.

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