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Value Added Tax

My colleague eloquently made a point about the administrative costs of the change, particularly for small business—a point that I wanted to make in slightly more detail. As he rightly points out, in this country 2 million companies are registered for VAT, and many of them will have the kind of practical problems that he describes, which clearly were not anticipated in the Treasury. The Government acknowledge that the compliance costs of the measure will be £300 million. Of that, £90 million is simply the cost of conversion; it is £50 million to cut the VAT and another £45 million to convert it back again. We are talking about an enormous administrative cost, particularly to small business, in terms of managerial time and practical problems of conversion. That will substantially reduce much of the benefits. My hon. Friend mentioned some of the problems, and I shall cite a couple more from my constituency. A local garage, Broad Lane Garage, wrote to me, without any prompting from me, to say:"““This imposed change has caused us, as a small business, great inconvenience and some expense…we have had bookings cancelled...The change to our systems has taken several telephone conversations and will ultimately require someone to come into the office out of their normal working hours to make the necessary alterations to our computer system””." The company asked me to use all my efforts to communicate those views to the Government. If necessary, it will organise a petition for me, without my having asked for it. A computer software company described some of the specific, practical problems that a company is likely to have as it works through the transition. A business man in Twickenham said:"““This VAT change is a potential disaster for businesses like mine. We run an IT company and we have just 4 days to get all our customer systems changed over. All our cash flow comes in from standing order mandates…Re-signing customer payment authorities is always difficult and the government have now given all business people particularly SMEs a real problem...If my customers take the opportunity to stop their payment mandates while they wait for us to issue new invoices with the VAT adjustment…it will be catastrophic for us and a good profitable technology business will be sacrificed for no good reason at all.””" I suspect that there are many arguments of that kind being aired in companies around the country. The final criticism that I want to make is about the Government's claim that the VAT cut is the fairest approach. There are very simple ways of testing the proposition that a tax change is fair. The Institute for Fiscal Studies will run through different tax changes to demonstrate their impact on different income groups. It has done that and points out that the impact of the VAT change on the richest 10 per cent. of the population will be to make them 1.6 per cent. better off, and the impact on the poorest 10 per cent. will be to make them only 0.6 per cent. better off. Obviously, most of the commodities most used by people in low-income groups, notably food, children's clothes and energy, at least at a lower rate, are exempt. My final point—this partly refers to the intervention from the hon. Member for Warwick and Leamington (Mr. Plaskitt)—concerns the alternative that we would advance. As I said at the outset, we do not believe that the Government should do nothing; there is a case for a fiscal stimulus. There are two elements to our answer. First, there are tax changes that are desirable. We have argued for a progressive change in the income tax system, cutting taxes for people at the bottom end of the income scale and raising them at the top by changing the system of allowances. That would have a differential effect on spending. It would be tax-neutral; it would not affect the deficit or public debt. However, it would provide a stimulus to the economy. The Institute of Directors has surfaced as an improbable ally, saying that"““an income tax cut would have put significant cash directly into pay packets, ensuring that people noticed and providing a more effective stimulus.””" The argument that one should use the income tax mechanism rather than VAT has broad support in that sense.