Scale of personal community charge payments

§ Mr. Michael Mates (Hampshire, East)

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

§ Mr. Speaker

With this, it will be convenient to take the following: Amendment (b), in line 10, after 'charge', insert 'on sliding scale in which the community charge payable increases from one half of the amount prescribed by the charging authority to one and one half times the amount prescribed by the charging authority in proportion to income, where the community charge is'.

Amendment (c), in line 15, leave out subsection (d).

Amendment (e), in one 15, after 'spouse', insert 'or person living with another person as husband or wife as denned in section 16(7)(b)'.

Amendment (f), in line 17, at end insert 'or the person with whom they are living as if in that relationship'.

Amendment (d), in line 17, at end add— '(2) Nothing in this section shall affect an individual's entitlement to community charge rebates calculated under the provisions of section 23 below'.

§ Mr. Mates

New clause I stands in my name and those of 44 of my right hon. and hon. Friends. I should like to deal briefly with a technical matter. Some authoritative sources have said, first, that my new clause is out of order, which clearly it is not, otherwise you would not have called it, Mr. Speaker, and, secondly, that it would require a money resolution, which clearly would be unsatisfactory and would cause my hon. Friends concern. I took this matter for advice early last week and on 13 April was informed by the Clerk of Public Bills: As drafted your Clause would not require a money resolution. That would only be a consideration if you required the Inland Revenue to be the collecting agent", which I do not, as I shall explain. The letter went on to suggest that I should make some consequential amendments, which have been tabled. I want to say to those of my hon. Friends who are listening to some of the arguments that, clearly, that is not what I am trying to do, nor is it the consequence of the new clause in the opinion of the officials of the House.

I have proposed, aá I think is now generally known, that we introduce, instead of a flat rate charge for the community charge, a banded system with three payment plans. I can say what I have to say in shorthand because the whole debate has had a good deal of publicity and I think that most hon. Members are aware of the terms of my new clause. The first band would be those who do not pay income tax; the second, which contains 90-plus per cent. of the population, would be those who pay income tax at the standard rate; and the third would be those who pay income tax at the higher rate.

574 This was worked out mainly during the Christmas recess and after Second Reading, as a result of what my right hon. Friend the Secretary of State for the Environment said on Second Reading to a number of us who were concerned about this aspect, and this aspect alone, of the Local Government Finance Bill. He challenged us, if we knew of a better idea, to produce one. He said that if there was a way of doing it, he would consider it and, furthermore, he would allow us to have it looked at. He has been true to his word. We came up with another plan; we submitted it to him; it was looked at by officials and then he and his colleagues said, "Thank you very much. We don't like it."

I do not quarrel with that. But the Secretary of State said—this has been a large part of the debate—that the new clause was unsatisfactory because it produced a sudden and painful earnings trap. That naturally caused us concern because—

§ Mr. Eric Forth (Mid-Worcestershire)

Will my hon. Friend accept that the new clause may also be unsatisfactory because it runs counter to the election manifesto on which virtually all Conservative Members fought the election? Apart from anything else, my hon. Friend must therefore explain to the House why he wants us to digress in a very basic way from the explicit terms of the manifesto on which we fought the election.

§ Mr. Mates

I fully intend to explain to the House why I have proposed the new clause and if my hon. Friend will allow me to do that in my own way we can perhaps then debate the proposal.

As I was saying, one of the major objections to the new clause was that it created a sudden and painful earnings trap. That would have been cause for concern and the suggestion did, indeed, worry many of my right hon. and hon. Friends. It was at that point that I went back to the Department of the Environment to speak to my hon. and learned Friend the Minister for Local Government. Let me say at this point that one of the good things about this debate is that it has been conducted throughout with courtesy and good humour. No personal attacks have been made by anybody against anybody else. We are debating principles and not personalities.

My hon. and learned Friend the Minister for Local Government then produced a graph, which has been much circulated because I produced it too. It helps the debate that we are both speaking off the same sheet of music. I then put the question to my hon. Friend—I put it again the other night to my right hon. Friend the Secretary of State —"Do Ministers agree or do they not that under my scheme not one person in the lower income brackets of society would lose one penny more than under the Secretary of State's scheme?" The Secretary of State has acknowledged that they would not lose, and that is now common ground between us. The phrase sudden and painful earnings trap is not the best phrase that could have been used, for the simple reason that nobody falls into that trap.

The objection has been raised that the Secretary of State's plan for rebates has a taper and therefore involves a gradual increase of a person's liability to pay as his income rises—that is shown on the graph produced by the Secretary of State—whereas my plan appears to involve a step at the point at which someone comes off the 50 per cent. rate. However, at that moment, one simply reverts to the curve that the Secretary of State has already proposed. 575 Meanwhile, a few people will have benefited—not many but some significant groups in society, the House may think. For example, married pensioners on rather high allowances who would be liable for the full charge straight away under the plan proposed by the Secretary of State will go part of the way on 50 per cent. under my scheme. My proposal will also help certain other groups, such as some of the disabled unemployed who have a high rate of allowances.

§ Mr. John Redwood (Wokingham)

rose—

§ Mr. Mates

Let me just deal with what was originally the strongest objection from the Government. In my scheme, there is no sudden and painful earnings trap whatever and no one is one penny worse off under my scheme than under the Government's scheme.

§ Mr. Redwood

Does my hon. Friend agree that under the Government's scheme, 9 million people are protected because they are on lower incomes and that, furthermore, all those protected under his scheme are protected because he has preserved the Government's protection, not by virtue of his own scheme? Therefore, if the matter is one of principle, is not that principle taken care of in the Government's proposals? Does not my hon. Friend agree that his scheme involves a large trap for those moving from 50 per cent. to 100 per cent. and from 100 per cent. to 150 per cent.?

§ Mr. Mates

My hon. Friend is quite right that both schemes are protected by the Government's rebate system. This debate is not about the Government's rebate system, although it may devolve on parts of it later. Of course the protection is the same with my scheme as with the Government's scheme. However, with respect, my hon. Friend is wrong in the sense that there is no trap between the 50 per cent. rate and the 100 per cent. rate. Where he is right is that there is a trap in the higher rate, and I shall come to that in a moment. I must leave this point, reiterating in the strongest terms the Government's concession that not one person who is lower paid would be worse off under my scheme. The new clause must be considered in that light. It may have other defects and other merits, but it is simply not the case that it is a trap for the less well off.

§ Mr. Churchill (Davyhulme)

I appreciate, as no doubt does the whole House, that my hon. Friend's desire is to help the most disadvantaged in our society. Can he say approximately how many will benefit under his scheme who would not benefit under the Government's scheme?

§ Mr. Mates

I cannot say precisely, because the Government cannot tell me precisely. I asked the Government and, in his letter to me, the Secretary of State replied that it would be a small group. I believe that the reason why neither he nor I can answer my hon. Friend's question is that the Government have not finally worked out their scheme. I do not criticise them for that, but the fact that they are unable to tell me means, alas, that I am unable to tell my hon. Friend.

Let me deal with the step between the standard rate taxpayer and the man on higher rate tax. It is right to assert in that case that there is a step. It has been argued 576 that £1 of extra income might produce a large extra responsibility for community charge. There is a step, but I must challenge my hon. and learned Friend the Minister for Local Government, who talks about a step of hundreds of pounds. He is using the worse case for his argument, which says that for someone earning about £22,000, £1 of increased income could mean liability for a further £600 of community charge.

§ Dame Elaine Kellett-Bowman (Lancaster)

In Camden.

§ Mr. Mates

My hon. Friend says, "In Camden." If that is the case and it remains the case, we have failed in the whole object of the Bill, which is to prevent high-spending councils from levying enormous community charges by increasing accountability so that people will not stand for it. If that is going to happen—and I hope that it will—we must conduct the argument using the average increase and not the extreme increase. If we are successful in achieving our aim, the extreme increase will vanish when the Bill becomes law.

§ Mr. Edward Leigh (Gainsborough and Horncastle)

Will my hon. Friend give way?

§ Mr. Mates

Can I just have a sentence or two? I shall certainly give way when I have finished my point.

Therefore, we must return to the argument about the average, because it is the argument about the average that my hon. and learned Friend the Minister is using. I concede that he is right that, at the £22,000 a year level, a few pounds of extra income will create an extra liability of £85—half the average community charge. If I may say so, for someone on £22,000 income, that represents one ticket to the theatre and one dinner. I do not believe that, given the gains that they will receive from the abolition of rates, the better-off will be unhappy about paying that sum.

§ Mr. Leigh

I am afraid that my hon. Friend has to recognise that as a result of his proposals some married couples may have to pay up to £2,400. That is a very expensive trip to the theatre. The result of the new clause would be to allow Left-wing councils, which he has opposed all his life, to drive enterprise out of their areas.

§ Mr. Mates

I have to say to my hon. Friend, "I am sorry, you are wrong." If my hon. Friend wants to make a speech and produce these figures I shall certainly answer him. I am merely returning to the principle behind my argument and was simply telling the Minister, who is trying to describe the step effect as a spectre of unfairness, that he must get the matter in proportion. We have conducted the whole debate on the averages across the nation, and under my scheme the average liability for one person is £85. My hon. and learned Friend the Minister shakes his head. Would he like to intervene?

§ The Minister for Local Government (Mr. Michael Howard)

I am grateful to my hon. Friend for his invitation to intervene. If the community charge had been in force in 1987–88, the average would have been £224. Half of that is not £85 but £112, and since, under my hon. Friend's scheme, wives would pay at the same rate as husbands, it is perfectly possible for someone who receives a rise of £1 a year in income to end up, on the average community charge, paying an extra £224.

§ Mr. Mates

I am grateful to my hon. and learned Friend and, of course, I accept his correction. On Second 577 Reading, he was working on a standard community charge of £176. It has now gone up, but that is another matter. Instead of talking about £85, I am now talking about £112. That is not an unreasonable step for someone on that level of income who has, quite rightly in the view of most hon. Members, gained so much from what we have done to the taxation system over the years.

§ Mr. Jim Lester (Broxtowe)

Surely the people who would be liable for that step are the people who would gain on their overall budget from the tremendous rate reductions that would follow the introduction of the community charge. They would be paying less.

§ Mr. Mates

My hon. Friend makes a valuable point when he says that such people will gain most. That is right, because they have been carrying an unfair burden. They are the people who gained most from the reduction in the higher rate of taxation in the last Budget. That is right too, because we want a lower-taxed society. If we are to achieve that we must add the responsibility to those who will be best off when we have completely revised our old and outdated system of rating—as we are doing. When we turn to a new system, it must be fair. My hon. and learned friend mentioned a salary increase of £1. If a person on a salary of about £22,000 a year gets an increase of £1, his first step is to change his accountant.

§ Mr. John Butterfill (Bournemouth, West)

Does my hon. Friend agree that many people with such incomes run small businesses and are self-employed, and that it may not be possible for them to take the sort of action that my hon. Friend implies?

§ Mr. Mates

I shall leave my hon. Friend to argue that point for himself.

I shall now explain to the House the method for collecting the community charge under the new clause. This has exercised the minds of many people who have looked at my clause and asked whether it will work and could the charge be collected. Fear has been based on argument from certain sources that has not reflected the way in which my scheme would work. I say again that in trying to work this out I have tried to follow precisely the Government's scheme in every regard so that the minimum change is necessary to the Bill consequent upon my new clause being accepted. The same registration process applies as applies under the Government's scheme. The Government's scheme has some difficulties, but my scheme produces no more.

The same form would be sent by local authorities to every person liable for the community charge under my scheme as under the Government's scheme. It is precisely the same system. So far there is no increase in bureaucracy or complexity because the bureaucracy and complexity are those that will be required anyway. I propose that there should be three more questions on the form. They are questions that go the heart of the concern of many people and are about the tax situation of the person being questioned.

The first extra question is: "Do you pay income tax?" If the answer is no, there is an assessment of 50 per cent. of the community charge. The second question is one that obviously applies to most people. It is: "Do you pay income tax at the standard rate?" If the answer is yes, the 578 assessment is the standard rate community charge. The third question is: "Do you pay tax at the higher rate?" If the answer is yes, there is an assessment of 150 per cent.

It would be very difficult and wrong for that information to be traded between the Inland Revenue and the local authorities. In conceiving the scheme I have made quite sure that that does not need to happen. I know that that was the cause of a good deal of concern among some of my hon. Friends. The form is completed on a self-assessment basis and signed with the same implications as apply on the form anyway about whether the person has told the truth.

§ Mr. Tim Devlin (Stockton, South)

Is it not right to say that some people would not be able to verify their income because many self-employed people do not know their income until two or three years afterwards, when the accounts are made up?

§ Mr. Mates

I am grateful to my hon. Friend and to other hon. Friends for making these points. I am coming to them because I know that they need to be answered. If I could be allowed to complete a point before being asked to give way, it would save the House a little time. I assure my hon. Friend that I shall come to the question that he asked.

Three extra questions are on the form. Self-assessment takes place and the form is signed. The community charge becomes payable, as under the Government's scheme, and is paid to the local authority. There would have to be inserted in the Bill a power for a random check of whether what people had said was correct. I shall explain that, because it has caused anxiety to some of my hon. Friends. We would have to give the local authority power to send the Inland Revenue a random selection of answers received from the taxpayers, saying that Mr. X has stated that he is a standard rate taxpayer and asking if that is correct, or that Mr. Y has said that he is a higher rate taxpayer and is that correct.

My right hon. Friend the Secretary of State said that this was a fiscal nuclear deterrent, in that it would be oppressive because those who were randomly selected would have to have all their affairs gone through. That is not at all the case. My right hon. Friend is not quite right. Ninety nine per cent. of the people of Britain are honest.

§ Mr. Cranley Onslow (Woking)

Is that a Government statistic?

§ Mr. Mates

My right hon. Friend asks whether that is a Government statistic. I shall not answer that question.

Most people in this country are honest, so in most cases the reply will come back from the Revenue that the answers are correct. That will be the end of the matter, because that is the only check that has to be made. In a small minority of cases, the Revenue will say that the answers are not correct. If that is so, an offence has been committed and the law will take its course in precisely the way that it will have to take its course if an offence is committed in the completion or non-completion of the Government's present registration and assessment form. Aside from that, there is no change in the system that I have devised.

§ Mr. Butterfill

On that point, does my hon. Friend accept that it will also be necessary to include on the form the tax reference of the person concerned? If that is not done, it would be difficult for the Inland Revenue to obtain 579 the information. Will he explain how he will deal with the problem of husbands and wives who are separately taxed or who may have the option to be separately taxed?

§ Mr. Mates

All those are complex arguments, which I shall be happy to explain to my hon. Friend, but I shall not take the time of the House to do so now. Suffice it to say that when the matter was examined—I want to be careful about how I say this—the Department of the Environment consulted the Inland Revenue. At my meetings thereafter, that issue did not form part of any objection to my proposals.

I do not wish to go further than that because I have been saddened by remarks over the weekend suggesting that I have behaved dishonourably by disclosing advice given to me by officials, courtesy of the Department. I know that my right hon. Friend the Secretary of State accepts that I have not made one remark about anything said by any official that was not said in the presence of Ministers. What was said to me in my one private meeting with a group of officials has never been made public—unless it was something that Ministers had heard about and to which they had assented. I do not think that that is a dishonourable way to proceed.

5 pm

On the operation of my scheme, I concede that some people will fall between two barriers—but it will not affect anyone at the lower end who will be taken care of under the Government's scheme. The only problem with lack of knowledge might arise between the standard rate and the higher rate levels. A few people will face some difficulty and will need advice. I concede that that is a complication that does not exist in the Government's scheme. However, the whole of the tax system is riddled with complications that are constantly referred to and fro between the Inland Revenue and the individual. Only a small number will hop over the barrier—[Interruption.] It is true. Only 9 per cent. fall in the higher rate band, so only a small number will be affected.

The problems of evasion have been raised, but they are the problems of the Government's scheme, not my scheme. There is no greater opportunity for evasion under my scheme than there is under the Government's scheme. It is true that there will be problems with collection, but they are the problems of the Government's scheme, not my scheme. The Government have conceded that collection will be a difficult task and also that the scheme will be easier to evade than the current rating system. That is why it will cost twice as much and will require twice as many staff. We understand all the difficulties involved in a radical change in the system—but they are inherent in the Government's scheme, not my scheme. The only problem inherent in my scheme and not in the Government's scheme is that of assessment.

§ Sir Peter Emery (Honiton)

My hon. Friend's scheme is based on the conception that a tax system with only two bands will exist for ever. If there were to be a Labour Government, who would introduce many more bands, where would that leave my hon. Friend's scheme?

§ Mr. Mates

I hesitate to tell my hon. Friend where my scheme would go should there ever be a Labour Government, but I do not think that it would be a vastly 580 different place from where the Government's scheme would go. The point is that there will not be a Labour Government. That is why we must legislate properly now.

The Government have conceded that my scheme is practical. The Secretary of State said that it could work if the Government wanted it to work—but they do not like my scheme as much as they like their own scheme.

§ Mr. Timothy Wood (Stevenage)

Can my hon. Friend clarify the effect of paragraph (d)? If an individual is earning £25,000 a year and his wife takes a part-time job and earns £1,000 a year, would that couple transfer from paying one and a half times two standard community charges—that is, three community charges—to paying two community charges? Would that additional income result in a reduction in the community charge?

§ Mr. Mates

If I understand my hon. Friend's question correctly, the answer is no—[Interruption.] I beg hon. Members to listen and not to scoff. It is a complex argument. We want to understand such complex legislation. I know that some Opposition Members are not in the least bit interested in understanding. We are trying to arrive at a better solution. A little less scoffing and a little more listening would help.

My hon. Friend the Member for Stevenage (Mr. Wood) is not right in his assumption. Paragraph (d), as amended—I had made a technical drafting error—puts the spouse in the same position as the wage earner if there is only one wage earner in the family. I acknowledge that that is not an ideal solution and, indeed, it involves a certain amount of rough justice. However, the rough justice will apply only at the upper end, and not in the middle band where 90 per cent. of people fall, who will pay the same as under the Government's scheme. I believe that to be in the overall interest of families.

§ Mr. Patrick McLoughlin (Derbyshire, West)

I am concerned about a point of fairness. If my hon. Friend's new clause is intended to produce a fairer scheme, why was it not considered to be a fairer scheme when the House discussed the Scottish legislation? Why does my hon. Friend propose a community charge for England and Wales that will be different from that already agreed for Scotland? That is most unfair.

§ Mr. Mates

I do not want to be drawn down the Scottish road, but if we were to discuss the way in which the charge has been introduced in Scotland, there might be even greater internal dissent. If the House accepts my new clause, obviously there must be an amendment to the Scottish legislation. The same system must apply in Scotland as applies in England and Wales. We now have the advantage of a certain amount of experience in Scotland.

Having established that my new clause is practicable, I shall explain why I am introducing it. This relates to a question asked earlier by my hon. Friend the Member for Mid-Worcestershire (Mr. Forth). When we started down this most difficult road in an attempt to reform a complex, outdated and unfair system, we said that we would abolish the rating system and replace it with a more broadly based tax that would be based on people's ability to pay—[Interruption.] That is true; we said that in 1974. We said that the rating system was intolerable and that, as a party, 581 we would do something about it. We have been trying to do so since 1974. Until we decided to take the plunge last year, we had failed.

Many efforts were made during our first eight years in office to find a better system—a Green Paper was published, a study carried out and a committee established, but each time we reached the reluctant conclusion that to proceed with any of the options identified would be less satisfactory than staying with the present system. Many of us were unhappy about that. Many were the voices from Conservative Benches saying to the Government, "Get on with it and do something." To their credit, the Government have done just that. I am behind the Government 90 per cent. of the way. Having said that there were three legs to the change, I strongly believe that we have dropped one leg. To many of us, that has made the tax not ideal and not fair.

§ Mr. Simon Burns (Chelmsford)

As a new Member of this House, who was not here in 1974, I find my hon. Friend's argument slightly disingenous and unfair. I fought the election on the 1987 Conservative party manifesto. I assumed that 632 other Conservative candidates fought the election on it. In that there was a quite clear pledge to a fixed community charge. To my mind, the Government have been implementing that pledge, not reneging on it. My hon. Friend's amendment seeks to stop the Government from doing what they are pledged to do.

§ Mr. Mates

I am grateful to my hon. Friend for his intervention. Of course I was coming to what we said in the last manifesto. The line before the line to which my hon. Friend referred states that we shall introduce a fairer system. That is at the heart of the debate. That is why there is some difference on Conservative Benches about the best way in which to proceed.

Several of my hon. Friends have asked me why I have not accepted the concession that the Government made on Thursday and withdrawn my objections. To their credit, the Government conceded that their scheme was not fair enough, did not do enough for the less well off members of society, and that more help must be given. I congratulate them. It is always difficult for a Government to change course. My right hon. Friend the Secretary of State—I suspect, with tongue slightly in cheek—said that he had not been responding to pressure and that he wanted to do it, anyway. I do not know.

The House will recall that, in 1986, we found ourselves in major difficulty with the revaluation of the rating system in Scotland. On that occasion, in much more difficult economic times, the Government had to make an emergency concession of £100 million or so to alleviate the worst of the hardship that the revaluation would cause. That did not make the rating system any fairer, and nor, with the greatest respect to my right hon. Friend, will the concession that my right hon. Friend made on Thursday.

An injustice is not removed by throwing money at it. It may be made less painful, but, if the system is not fair, it must be changed, not the amount of help that is available to it. That is why the Daily Express, under Saturday's banner headline, Not a Penny More", could not have misunderstood what my hon. Friends and I are seeking more directly. We have not asked for a penny more. We are not asking for a penny more.

582 One of the reasons I came to the conclusion that this is the best way in which to present an alternative is that fundamental to everything that I am doing has to be the fact that it does not cost any more money. If it did, all my hon. Friends would say, "There he is. He is asking for more public expenditure." I am not asking for more public expenditure. It is right that we should control and restrict public expenditure, but, when we are reforming the whole taxation system, at the heart of it we have to make it fairer.

§ Mr. Tony Marlow (Northampton, North)

I am grateful to my hon. Friend. I want to ask my hon. Friend a point of clarification with regard to the position of a spouse—husband and wife. Am I right in believing that if one of the husband or wife goes into the higher rate of taxation then they will both have to pay the higher rate of community charge?

§ Mr. Mates

No, my hon. Friend is not right, unless they are both earners. The only time when these things are done is when there is a non-earning spouse. I use the word "spouse" because some people regard the word "wife" as sexist. Again, it is a matter of detail.

5.15 pm

My right hon. Friend has met some objections and he has responded to pressures. I ask him to remember what is written in St. Matthew's gospel, which states: Whosoever shall compel thee to go a mile, go with him twain.

I am not asking for a confrontation with the Government—not to have a knock-down, drag-out fight at 10 o'clock tonight. I hope that that will not happen. I hope that those who listen to the debate will hear a n acknowledgement by the Government that, in future, they will base the Bill on the principle that it must relate to ability to pay. If my right hon. Friend says that, but then says, "I think that your scheme is crazy, bad, mad and hare-brained," that is fine with me, because I shall withdraw it, knowing that the Government, with the resources that they have, are bound to come to a better conclusion than I. But the Government need to change that one fundamental principle.

§ Mr. Kenneth Hind (Lancashire, West)

Does my hon. Friend agree that 50 per cent. of local government expenditure in most areas comes from the rate support grant that is provided by the Treasury? It is means-tested and comes from income tax. With my right hon. Friend's system, at least half the community charge is means-tested. Surely that meets my hon. Friend's argument.

§ Mr. Mates

As I have tried to demonstrate, that meets half the problem. The system has quite rightly tackled inability to pay, but it does not tackle ability to pay. The people who are most concerned about the present system are those who are just above that level—the people who are not at the level at which they get subsidies, but are struggling to make ends meet. As presently drafted, the Bill asks them to pay precisely the same in community charge as the richest alongside them in their communities.

I am conscious that I have detained the House for too long, and I apologise. It is because of the number of interruptions. I say to those of my right hon. and hon. Friends who have been good enough to support me and to sign my motion that I do not find it comfortable to stand here, offering criticism to the Government. I did not want the matter to be brought to a head in a full-scale debate. 583 For four months, I have quietly tried to persuade Ministers and others that we can make the change without destroying the legislation. I still believe that we can make the change without destroying the legislation. I believe, too, that my right hon. and hon. Friends who have come with me so far will make up their minds tonight, not about the minutiae—but not about an odd little trap or an odd wart here and there in the legislation. For goodness' sake, if the legislation were perfect, we would not set out with 139 Government amendments—that is after the Committee's deliberations and Second Reading.

My new clause should not be dismissed as cursorily as some have tried to dismiss it. It is worthy of debate. If, at the end of the evening, there is no concession from the Government, those who believe that this tax must be fair have to go into the Division Lobby to say so. The legislation will go on to the statute book, will become law, and will be effective in 1990. Only then will we know what the people outside this place think about it. Only then will we be able to gauge the effect of the measures that we are taking now.

I say to my hon. Friends, with the greatest respect, that, whatever else this new legislation is known as, it will be known as a Tory tax. We can accept taxation. Although no one likes it, taxation is acceptable to the vast bulk of people of this country because by and large it is perceived to be fair. My sole anxiety is that we must make every effort to see that this piece of taxation is seen to be fair and thus acceptable to the people at large.

§ The Secretary of State for the Environment (Mr. Nicholas Ridley)

It might be to the advantage of the House if I give my response to the speech of my hon. Friend the Member for Hampshire, East (Mr. Mates) and his new clause. I realise that new clauses 2, 5 and 7 have not yet been debated, although they are down for debate at this time, but it is true that all these new clauses suggest alternatives to the Government's plans for raising local revenue. I make no complaint that we are still discussing the principle of that matter even after two years and a very long Committee stage. It is right that we should. It gives me one more opportunity to demonstrate that we have the best solution.

Our solution is based on two principles. First, it makes nearly everyone contribute, at least a little, to local revenues, so that all can participate in democracy at local level. Secondly, the charge is moderated according to people's ability to pay, without detracting from the first principle of accountability. The right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) spelt out the Labour party's alternative and I do not intend to dwell on it. I should like to close, but I think that I should address myself to my hon. Friend's new clause. The right hon. Gentleman suggested a local income tax. He is trying to achieve that in new clause 5 and in the amendments to my hon. Friend's new clause. He also suggested capital value rates. To demolish that suggestion would be a very nice debate, but I leave that to others. The hon. Member for Southwark and Bermondsey (Mr. Hughes) has tabled new clause 7—this is about the only issue on which all wings of the erstwhile alliance agree—which proposes a local income tax.

The longer our debate has gone on, the more I have examined other alternatives. The more I have heard the 584 arguments for those other proposals, the more I have become personally convinced of the merits of our proposals. Locally determined taxes, based in any way on the national income tax system, are all unsuitable as a method of raising money from local people, even for part of the cost of local services. I shall give hon. Members a number of reasons. In this country, local authorities are relatively small geographically, but large in terms of expenditure. The objection that I shall give applies to all the new clauses that we are discussing, and I want to explain why.

First, a local income tax, or any variant of it, would diminish local accountability. Local services, provided by the local authorities for the local community, benefit everyone in that community. Everyone benefits, so everyone should contribute. Everyone should have the right, through the ballot box, to influence the level of service that is provided and the price that they must pay through their taxes. That is the essence of accountability and of responsible democratic control of the services provided by local authorities.

§ Mr. Simon Hughes (Southwark and Bermondsey)

Will the Secretary of State tell the House why, in his book, one principle is applicable for local government, but a different principle, whereby people pay for national services according to their ability to pay, has been endorsed for decades by his and every other Government in this country? Why are there different standards for the two levels of government and not the same principle—no taxation without representation—for both, as we are used to in this democracy?

§ Mr. Ridley

The hon. Gentleman would be wise to wait to hear what I shall say. I shall have ample response to the points that he has raised.

Secondly, the large variations in spending between the different authorities cause significant, and in some cases substantial, variations in the rate of taxation between neighbouring areas. The result is a strong incentive for local brain drains, whereby it pays people to move from one area to another to reduce their tax liability. The incentive is at its most severe with a full local income tax, and it is most ameliorated with a local community charge. My hon. Friend's suggestion in new clause 1 for a three-band system is somewhere in between.

A tax of this sort causes high spending to feed on itself by driving out the better-off and causing the need for higher charges on the less well-off. The unequal distribution of the better-off is bound to set up a need for resource equalisation and, as its effects work through, the resource equalisation system—

§ Mr. Tony Banks (Newham, North-West)

rose—

§ Mr. Ridley

No.

—gets more and more complex and larger and larger, as we have discovered with the present rate support grant system. That applies to new clause 1.

Thirdly, the better-off tend already to be concentrated in some council areas, and, alas, absent from others. The grant has either to be switched from the richer to the poorer areas, meaning that people can no longer equate the size of their community charge to the performance of their own council, so weakening the accountability, or—I do not know whether my hon. Friend would like that—they would have to live with the situation where the 585 better-off areas may have a lower community charge than the poorer areas, because they would have access to a number of people paying one and a half shares. That is the obverse of what we should be seeking to achieve.

Fourthly, the technical arguments are also strong. The Inland Revenue knows that people's incomes are for national income tax purposes, but does not know where they have their sole or main residence. Neither the present system, nor those splendid new computers that the Inland Revenue is soon to commission, tell us that. To graft a system of local charging on to taxable income requires that local authorities not only have to compile a register of persons having their sole or main residence in each area—as my hon. Friend generously acknowledged—but they have to establish what their incomes are, or at least what band of income they fall into for my hon. Friend's scheme. That register would have to be a register of all adults, whether they are non-income, standard rate or higher rate income tax payers, and not just the heads of households. That is an immensely complicated administrative task.

Paul Beresford, the leader of Wandsworth borough council, expressed this point very clearly only last week, when he said: If the amendment were accepted, one could easily imagine the typical elector's response, having registered for community charge, to find that they also have to declare their personal tax bracket. Furthermore, these well-meaning Back-Benchers have not foreseen the enormous scale of bureaucratic time that will be required to be spent on extracting the information, locating the relevant tax office, checking their declarations and sorting out the inevitable discrepancies. Over and above that, they apparently have given little thought about the number of times this effort must be repeated every year to deal with the changes of residence, jobs and earnings, as well as tax system changes. It would be well nigh impossible to get to grips with the unimaginable complexity of a rebate system in which a small rise in income will usually lead to a lower rebate, but will sometimes lead to a higher rebate, coupled with a doubling in the underlying charge". The Association of District Councils, which is controlled by the Conservative party, has expressed similar views, as my hon. Friend the Member for Hampshire, East knows.

§ Mr. Patrick Cormack (Staffordshire, South)

I do not quarrel with my right hon. Friend's quotation, but is he aware that the Conservative leader of the Association of County Councils, which is opposed to the present scheme, endorsed that body's opposition, and said: On this crucial issue the Association wishes to see ability to pay reflected to a greater extent than in the present proposal. Some councillors may feel that the proposals that have been put forward by my hon. Friend the Member for Hampshire, East (Mr. Mates) do not make a great deal of sense, but the general view of Conservatives in the Association of County Councillors is directly to the contrary.

§ Mr. Ridley

My hon. Friend is confusing two things. At this point I am talking entirely about the possibility of administering the scheme and what that would involve. What the ACC has said is not about that; it is about the principle. I am talking about the administration of the proposal.

§ Mr. Devlin

Does my right hon. Friend agree that it is very much to be welcomed that, for the first time since the matter came before the House, there is an element of real 586 opposition and of real contribution to the legislation as it goes through the House? We sat through many hours in Committee, during which Opposition Members contributed little, if anything. Therefore, the debate is limited to discussion among ourselves as to how best to implement the financing of local government.

§ Mr. Ridley

I agree with my hon. Friend. I only hope that the Opposition's contribution to today's debate will not simply be trying to shout down that which they do not like, while my right hon. and hon. Friends and I debate the issue seriously.

§ Mr. Stuart Randall (Kingston upon Hull, West)

rose—

§ Mr. Ridley

No, I have given way already.

Fifthly, any tax of this sort has to be enforced. There are two ways in which it could be enforced. The first is that the Inland Revenue could be required to tell councils the taxable income of each of its residents. This would be deeply offensive to the House on privacy and data protection grounds, as well as being beyond the present administrative competence of the Revenue.

The second would be a form of self-assessment—[Interruption.] The Opposition are living up to what I predicted they would do. They are trying to shout down the debate. The second is a form of self-assessment, as suggested by my hon. Friend the Member for Hampshire, East. He suggests that everyone should have to declare his status as a taxpayer. There would then have to be some verification procedure, and that is where the difficulty arises. I gather that my hon. Friend suggests that the council could challenge one in every 1,000 or in every 5,000—what it thought appropriate—and ask the Inland Revenue to adjudicate on whether that person is in the category that he has declared.

The problem that the Inland Revenue does not know where people live becomes immediately relevant from the moment that the first challenges start. Apart from that, there is the awful opportunity that this would give a local authority to discriminate between those to whom it issued a challenge. I can see politics coming into this. It is an appalling prospect that accusations could be made against citizens on a random basis, with no evidence whatsoever, on whether they fell into one category or another. Who would be the final arbiter? Would the Inland Revenue decide, or would there be some appeal? Surely there should be an appeal either to the commissioners or to some other tribunal or court, to decide whether the details of that person's income as given by the Revenue were correct.

We had a debate in Committee about the number of people called John Smith who might get mixed up, even in the same local authority area. We must make sure that we get it right, but my hon. Friend the Member for Hampshire, East has not so far suggested any ways in which that could be done. What would the penalties be?

§ Mr. Simon Hughes

rose—

§ Dr. John Reid (Motherwell, North)

rose—

§ Mr. Ridley

I have already given way to the hon. Member for Southwark and Bermondsey (Mr. Hughes); I give way to the hon. Member for Motherwell, North (Dr. Reid).

§ Dr. Reid

As the Secretary of State is labouring the point about a bureaucratic nightmare, will he explain why 587 all investigations into income tax can be made with the full support of the Government, without it being a bureaucratic nightmare, when it comes to housing benefit, family income credit or finding out whether an old-age pensioner has £6,000 in the bank, or when it comes to preventing someone from gaining benefits from the social security system, but when it comes to applying to the same system to income verification to alleviate the poorest from paying the poll tax it suddenly becomes impossible and a bureaucratic nightmare?

§ Mr. Ridley

Because the social security system will tell the collecting officer, under the community charge, what percentage should be raised from each payer according to the rebate that he is due. Councillors will not get to know about it.

I ask my hon. Friend the Member for Hampshire, East, to say what the penalties would be for a false declaration. How would he cope with the fact that some incomes are not determined for several years after the tax year has ended? He must make some plan for giving refunds to those who can prove that they were not in the bracket in which they originally thought they might be when they had to fill in the form. That is one of the great difficulties. A person would be asked to state the category that he was in before he could know what his income would be. All those problems would have to be thought out and solved, if solved they could be, which I doubt.

Sixthly, the concept of basing some form of tax on national income tax is full of anomalies. What may be appropriate as a national relief from income tax may not be appropriate as a local relief. For instance, mortgage interest relief, age allowance, working expenses and even life assurance premium relief all shift the point at which one moves from one level of national income tax to another, yet is it right that they should affect one's liability for a local charge, which is in the nature of paying for the services that are received? A cut in the mortgage rate because interest rates are falling could have the effect of pushing people into a higher band or rate of community charge.

Moreover, our rebates are closely aligned to the ability to pay. They are based on assessing the needs of the less well off and then assessing their means. Either benefit or community charge rebate is aligned on the gap between the two. Income tax takes no account of needs—it merely takes a slice of the means. Basing any system of local taxation on income tax scales is bound to be unfair to the less well-off.

For all those reasons, the income tax system is not a suitable vehicle for a locally variable tax on the better-off. It is both easier and fairer to achieve any redistribution of income for which hon. Members seek through the national taxation system.

§ Mr. Tim Rathbone (Lewes)

Will my right hon. Friend give way?

§ Mr. Ridley

If I may just finish this point, I shall certainly give way.

Hon. Members can express their views about that proposal in the coming Finance (No. 2) Bill. If it were thought right to charge the equivalent of one and a half community charges on higher rate taxpayers, as my hon. 588 Friend suggests, it could easily be done by increasing the higher rate of income tax from 40p to 41.5p. That would produce the same amount of money.

The logical extension of that would then be to ensure that the amount raised found its way equally to local authorities through the Government grant system. For those who wish to achieve that objective—I am delighted that the Chancellor of the Exchequer has been able to reduce the top rate of income tax, as I think my hon. Friends are, and I do not want him to increase it again—that system avoids all the complexities, problems and difficulties that I have been highlighting.

§ Mr. Rathbone

To return to my right hon. Friend's point about the inequities of the new clause for the lower paid, how can he say that it has any effect on the lower paid when it embraces all the Government's actions to alleviate the burden of the community charge on the lowest paid and when 90 per cent. or so of those who pay income tax will pay exactly the same charge as the Government are asking them to be charged? The new clause will have no effect on the lower paid.

§ Mr. Ridley

I have a great deal to say about that, but in order not to dodge the question my answer is that if more money is to be spent on the less well-off by helping them with their charges, there are much more accurate ways of targeting the more deserving, which the Government have already adopted, as I shall show.

That link with grant, and thereby with national taxation, brings me to the next crucial point. It is necessary to consider the community charge, not in isolation, but as one source from which money will be raised for local services. The community charge in England will provide only about one quarter of the total cost of local services—half will come from Government grants paid from progressive national taxation. That is why households with the top 10 per cent. of earnings will contribute about 15 times as much in total towards the cost of local services as the bottom 10 per cent. Therefore, payment for local services is progressive and based on the ability to pay.

I quote in aid the words of the right hon. Member for Bethnal Green and Stepney (Mr. Shore), who is in a distant quarter of the Chamber—perhaps this is why—when he announced the Government's response in 1977 to the Layfield committee. He said: the Government finance about 60 per cent. or more of local government expenditure through the rate support grant. That is finance out of general taxation to which other people contribute just as much as householders do."—[Official Report, 19 May 1977; Vol. 932, c. 720] The right hon. Gentleman was absolutely right. He realised that the best way that the better-off could be made to pay more was through their share of the cost of Government grant. That must be right. That also means that our proposals are related to the ability to pay, both at the top end of the scale and at the bottom.

All these thoughts lead one to conclude that the best system of financing local government based on the ability to pay is, first, that everyone should make a direct contribution to achieve accountability; secondly, to use the social security system to reduce the liability of the less well-off; and, thirdly, to finance the lion's share of spending by progressive taxation collected by the national income tax system and paid as grant. In that way the better-off contribute the highest share. That is precisely what we have done.

§ Dr. Keith Hampson (Leeds, North-West)

Would the logic of my right hon. Friend's final comment about moving the bulk of the burden on to direct taxation be to transfer the bulk of the cost of education to progressive taxation, such as Lord Joseph proposed, with a 75 per cent. education grant? A specific grant could let the Government off the hook, in that the poll tax could be cut across the board.

§ Mr. Ridley

My hon. Friend is right in theory. If more money is transferred to Government grant, it has the effect of reducing the community charge and increasing what the better-off pay to Government grant. That figure need not be related to any particular services, whether education or police. That is not the right calculation.

The right calculation is how big a share should come through the grant, and what should be the resulting levels of community charges? All that is open for discussion and debate, and whatever the answer, the mechanism is in the Bill and would be wrecked by the new clause.

There are additional difficulties with the proposal in the new clause for a one and a half charge for higher rate taxpayers. I expect that that will not satisfy the Labour party, which wants to hit the better-off. Nor does it raise much money—about £200 million, which is sufficient only to cut the basic community charge by 10p a week for those on the ordinary rate of charge, most of which, if not all, would probably be lost because of the extra costs of administration, which, we are assured by local authorities, would be substantial.

§ Mr. Matthew Taylor (Truro)

The Secretary of State said that that would cut 10p for the ordinary ratepayer. If there is this much-vaunted rebate extension scheme, which he has announced proudly, it will mean that a student nurse studying in Camden who previously paid 17 per cent. of her income, equivalent to £15.03 in community charge, will pay £14.87, giving her a benefit of 16p. Is the difference between 10p and 16p particularly relevant in this case?

§ Mr. Ridley

That depends on many circumstances, and I shall come to the details of the rebate scheme shortly.

The new clause produces some additional awkward side effects, apart from the administrative problems. The right hon. Member for Islwyn (Mr. Kinnock) identified these and mentioned the large step in liability as one's income passes a certain point. I am sorry that he is not here this afternoon. There are two such steps: one when someone first pays income tax, contrary to what my hon. Friend the Member for Hampshire, East alleged, and the other when one reaches the higher rate of tax. They could easily be £200 or £300 steps for a couple, and more in the high-spending areas. As my hon. Friend wishes, I shall quote the average figures.

Obviously, there will be a smaller trap if one goes from the half rate to the whole rate only if the rebate is still there when one travels down that slope, but in many cases there will be a 50 per cent. increase in charge when tax liability is reached. Those are serious traps which could cause people to avoid overtime or more wages. Indeed, they are probably the highest incentive imaginable to operate on the black economy.

The Leader of the Opposition was right to dissociate himself from the new clause on that ground alone, and I 590 am sure that he will have the courage of his convictions and not vote for it. I shall be glad to hear what he will do He made it clear that he thought that the new clause was bad. I do not know whether the hon. Member for Copeland (Dr. Cunningham) has bullied him to stay away from the debate because he is a doubter in his own ranks.

With their amendments, Opposition Members have tried to turn new clause 1 into a more overt form of local income tax, which is at least logical in view of all the difficulties of my hon. Friend's scheme. That means that there is no halfway house between the community charge and local income tax, and I accept that that is what hon. Gentlemen are trying to achieve and point out.

§ Mrs. Elizabeth Peacock (Batley and Spen)

I ant listening extremely carefully to what my right hon. Friend is saying, and he has spent some time saying how unfair the new clause is. Before he sits down, will he explain to those who support the new clause how fair the Government's proposal will be?

§ Mr. Ridley

The answer to that is yes. I understand fully the anxiety that my hon. Friends have expressed about the position of the less well-off under our rebate scheme. Throughout our deliberations on the subject, we have been acutely aware of the need to protect people on low incomes from hardship, and I am satisfied that the generous rebate system will achieve precisely that. As the House knows, I improved it last week.

§ Mr. Timothy Raison (Aylesbury)

Will my right hon. Friend confirm that the rebate scheme, however generous, is subject to the capital limits from which housing benefit has suffered, whereas the scheme in new clause 1 would not be subject to capital limits?

§ Mr. Ridley

That is obviously right, but my right hon. Friend must admit, if he wants to base relief on ability to pay, that those with large capital have the ability to pay.

My hon. Friend's motive in trying to help people on low incomes is laudable, but his scheme does not achieve what he wishes to do. Its incidence, in terms of those whom it will help, is capricious. It does nothing for those just above benefit level—those between 80 and 50 per cent. rebate. The poorest people are already eligible for 80 per cent. rebate. It does nothing for most of those in areas with the highest community charges, and the help that it gives particular groups depends on the relationship between their tax thresholds and the benefits system. Benefits are much more closely aligned to ability to pay than is income tax, because they take account of needs as well as means. They are a much better basis for helping the least well-off.

Of course my hon. Friend is right to say that his scheme would make no one worse off, but that would happen, too, with the improved rebates that I suggested last Thursday. On the basis of 1988–89 tax thresholds, the main groups that he would help are single people living in low community charge areas and some pensioners who benefit from the higher income tax age allowances. Thus, its effects would be arbitrary. The new clause would add the quirk that, at the 50 per cent. rebate level, the rebate would not reduce as income increased until the point was reached where income tax became payable. Then there would be a sudden jump in liability, which could mean an additional £100 or £200 in community charge a year, depending on whether it was an individual or a couple, for each extra £1 591 of income. That is another example of the step effect against which the Leader of the Opposition rightly warned.

We have made our rebate system more generous, but we have targeted it very much better. We have reduced the slope of the taper from 20 to 15 per cent. This means that a single person aged over 25 with a £300 community charge would not have to pay the full charge until his or her gross income reached £4,550 per annum, and that a married couple with two children aged under 11 would have to earn a gross income of £8,800 before all rebate was withdrawn. While preserving the principle of accountability, everyone will benefit if a council reduces its spending. We are now extending help to 9 million people in the very area about which concern has been expressed. I can think of no scheme more closely attuned to ability to pay.

My hon. Friend acknowledged that if there are difficulties—or warts, as he called them—in his scheme he would be happy for the Government to take it away and come back with an improved scheme. The hon. Member for Copeland was even more generous. He would give me power to make regulations to design a totally new tax by order, which goes even further than my hon. Friend would.

I ask the House to reject the new clause. We have looked carefully at my hon. Friend's scheme and we genuinely find it wanting in the many respects that I have described. That is not because the details are wrong and could be improved. It is not because the experts in Whitehall could make a thorough and effective job of what my hon. Friend propos