Finance Bill: Rate of VAT

David Gauke winds up a series of debates on different groups of amendments and outlines the reasons why the rise in VAT rate to 20% is necessary.

Mr Gauke: In his Budget of 22 June, my right hon. Friend the Chancellor announced that the standard rate of VAT would increase from 17.5% to 20% on 4 January 2011. Clause 3 and schedule 2 effect this change. In the course of this afternoon, we have had a good and lengthy debate. Several hon. Members have spoken to amendments that would either cancel the rate rise entirely or reduce its effects. Of course, we understand hon. Members' concerns about the impact of this change on low-income households. I therefore propose to reiterate our reasons for taking this path, in the course of which I will deal with the various amendments.

Before doing so, it is necessary to point out that the VAT rise was one of the central measures in the emergency Budget-a Budget made necessary because the coalition Government have inherited from their predecessors the largest budget deficit of any economy in Europe with the single exception of the Republic of Ireland. The independent OBR's pre-Budget forecast revealed that the structural deficit-the part of the deficit that will not go away with the recovery-was higher than previously thought, at around £12 billion, or 0.8% of GDP, higher in 2011-12. That means that £1 in every £4 we spend is being borrowed. The gap stands at £149 billion for this financial year alone, yet the previous Government left us with no credible plans to reduce their record deficit. The OBR forecast that, if we had continued with the previous Government's plans, debt repayments would reach more than £67 billion by 2014-15-more than is currently spent on defence or on schools in England.

Nothing at this time is more urgent for Britain than setting out a tough but realistic plan that demonstrates how we will regain control of the public finances. We have literally no other option. The Government are therefore taking urgent action to eliminate the bulk of the structural deficit as a necessary precondition for sustained economic growth. High levels of public debt could lead to a loss of market confidence and higher interest rates, raising the cost of borrowing for families and businesses and discouraging investment and consumer spending. To continue with the existing fiscal plans would put the recovery at risk, given the scale of the challenge and the risk posed by the sovereign debt crisis in Europe.

My hon. Friend the Member for St Ives (Andrew George) asked about the Government's willingness to make hard choices. It is necessary to look at this VAT measure in the context of the overall Budget measures. It is not possible to remove it, because the central message of the Budget was that we have a Government who are willing to get to grips with the deficit and to bring our borrowing down, and if we are to address that quickly it is necessary to move forward with the VAT increase.

Andrew George: I understand that hard decisions need to be taken. Last night, when the Financial Secretary spoke to the British Bankers Association, he mentioned a new initiative-a proposed additional levy on banks in respect of their bonuses and profits. Does the Exchequer Secretary know what that might yield? I am sure that many of us in this House would prefer to see those who contributed most to getting us into this difficulty doing most to help us to get out of it, rather than levying rises in VAT.

Mr Gauke: I assure my hon. Friend that this Government are determined to raise as much as possible from the banking sector. He makes the very good point that it is right that those who got us into this mess should contribute significantly to getting us out of it. However, we need to move quickly to provide reassurance to international investors that the UK is a safe place in which to do business and that we will not be caught up in a sovereign debt contagion. His point is well made, but we still have no choice in needing to raise substantial sums of revenue in a certain way.

We were left with a very difficult choice as to whether to fill the black hole with yet more spending cuts or increase taxes. Further spending cuts would have made it impossible for the Government to protect the country's most essential services in the spending review. It is notable that, in the past couple of days, two of the candidates for the leadership of the Labour party have suggested that the previous Government's own plans on cutting spending went too far. The shadow Education Secretary has questioned whether they were seeking to cut the deficit too much by cutting taxes, while the shadow Health Secretary has said that they should have looked more at raising taxes. I see no appetite on the Labour Benches for more spending cuts. The only other option would have been to raise taxes on corporate profits or on personal income, reducing the rewards for work at a time when hard work and endeavour must lead the recovery and ensure that we have a private sector-led recovery. We need to reduce the deficit in a sustainable way that does least damage to growth. While the bulk of the deficit reduction will come from spending, tax also has an important part to play.

We increased VAT rather than increasing income tax or national insurance contributions, which are probably the only other sources of revenue with the capacity to raise the necessary sums, because that was the least economically damaging way of doing this. Of course, we are not alone- [ Interruption. ]

The Temporary Chair: Order. It is very difficult for the Minister to hold the attention of the Committee with so much going on; he looks disturbed by the chattering. Can we give him a chance to finish his speech in peace?

Mr Gauke: Thank you, Mr Hancock.

Of course, we are not alone in reaching the conclusion that the right step is to raise VAT. With exquisite timing, we saw today the serialisation of Lord Mandelson's memoirs, in which he noted that the previous Chancellor had reached the conclusion that raising VAT was the right thing to do. Apparently, he told Lord Mandelson that he was

Lord Mandelson tells us that he was "impressed" by this. He says:

Well, they did not take the hard choices and they did not regain the initiative-but we will.

The Budget has already had an impact on the credibility of British economic plans. As the director of the CBI has said,

The Fitch rating agency said:

the

I am afraid that I cannot accept amendments 13 and 14, tabled by the hon. Member for Dundee East (Stewart Hosie), which would stop the VAT increase from happening. I have explained that we have no option other than to take this action, and I therefore ask the hon. Gentleman to withdraw them. Similarly, amendment 22, tabled by the hon. Member for Nottingham East (Chris Leslie), and amendments 54 and 55, tabled by my hon. Friend the Member for St Ives, would undermine the basic rationale for the increase. They would not allow us to reduce the deficit as quickly as we would like. I agree with the observation made by my hon. Friend the Member for St Ives that one would have expected the shadow Chancellor to support amendment 54.

I have a particular concern about amendments 22 and 55. One argument made for the temporary VAT cut by the previous Government was that it would shift expenditure into the relevant year, 2009, when the VAT rate was somewhat lower, and therefore accelerate the recovery. If we did the reverse of that and had a sunset clause, essentially setting out plans to increase VAT but with a promise that we would then reduce it, it would have the reverse effect. It would defer expenditure, which would damage the recovery.

I note the point made by the hon. Member for Foyle (Mark Durkan) about the Government's views on sunset clauses. The tax policy document that we produced is very good and has been well received, but the arguments for a sunset clause in the case of a rate change are not very persuasive, particularly given the economic effects that it would have.

Andrew George: The premise behind my amendments was that, as this is an emergency Budget, the VAT rise must be an emergency measure, which must surely be time-limited. Can the Exchequer Secretary confirm to the House that there is no intention of retaining the 2.5% rise for all the coming years of this Parliament?

Mr Gauke: We have announced the policy and the increase. All taxes are reviewed on an ongoing basis, and that will obviously be the position with VAT. However, for the reasons that I have set out, it would not be sensible to have a sunset clause. It would have a damaging effect on the pattern of expenditure.

Underpinning the Government's approach is a commitment to fairness. Consequently, the VAT increase will apply only to the standard rate, ensuring that the zero rate is maintained on everyday essentials such as food and children's clothing, and that the 5% rate on domestic fuel and power stays in place. It is also part of a wider Budget package in keeping with the Government's commitment to tackle the deficit while protecting the most vulnerable.

The VAT charge is part of a fair and progressive Budget, and the wider package contains a number of measures specifically intended to help the most vulnerable, in particular the increase in personal allowances by £1,000, the triple lock for increases in the basic state pension and the above-indexation increase in the child care element of the child tax credit. All sections of society will contribute to tackling the deficit, but the richest will pay more than the poorest. That has been supported by the chief executive of Barnardo's, who has said that

Amendments 1 to 4 would provide that the rate increase would come into effect only after an impact assessment had been laid before the House. Similarly, amendment 25 would provide that before the rate increase took effect the Chancellor must produce a report on its impact on a number of specific groups. Amendments 41 to 43 are further variants on that theme, as is amendment 46. Together, they would provide that the increase be deferred until the earlier of 4 January 2012 or the date of the production of a report on the impact of the increase on disabled persons, pensioners, children and child poverty, inequality, the bottom quintile, charities and the informal economy.

Those amendments are unnecessary. At a time when the Government need to show a willingness to tackle the deficit and a sense of direction to ensure that there is confidence in the running of the British economy, it is vital that we have the credibility of bringing the VAT increase into effect as soon as possible. It is worth noting that the OECD has stated that the Government have demonstrated that they are taking courageous and appropriate action in the Budget. That is what we are doing, which is why it is right that we reject attempts to delay the implementation of the VAT increase.

Although we have not necessarily labelled all the material that we have produced on the matter as impact assessments, we have produced a great deal of material about the impact of the VAT increase and the Budget more generally. It would be damaging to businesses if we did not proceed, as they need the certainty that we will do so.

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I shall set out some of the impacts of the rise that we have already described. In annex C of the Red Book we set out the OBR's assessment of the economic impact of the Budget measures. The impact of the VAT increase is built into the inflation forecast in paragraph C.19. Paragraph C.23 sets out the impact on household demand and paragraph C.24 the impact on company profits. Paragraph C.5 sets out the OBR's view of the VAT tax gap, and paragraphs C.39 and C.64 explain that VAT is expected to fall as a percentage of GDP, because the OBR assumes rebalanced economic growth with consumption - [ Interruption .]

The Temporary Chair: Order. I think it is in the best interests of the Chair and everyone here if we get a chance to hear what the Minister is saying. He is trying to express his point of view in answer to a very long debate, so let us have a bit of patience and let him finish his speech so that we can all hear it.

Mr Gauke: Thank you, Mr Hancock. I could go on setting out the lengthy list of information about VAT that we have provided. The Opposition's case that there has not been any analysis is all the more ironic given that Labour was the party that produced the doubling of the 10p rate of income tax and provided no distributional analysis whatever. We, however, have examined that particular tax change, and it is worth noting that the five bottom deciles lost out and the five top deciles gained. That is what our predecessors did, and it is not the case under the distributional analysis of VAT. As I have said, there is a strong case for looking at the expenditure basis, which shows that VAT is indeed progressive.

The impact on pensioners is a legitimate concern, but if the focus is on those with the lowest income, that needs to be considered in the context of the overall distributional analysis.

Amendment 23 would provide for children's prams, cots, nappies and other items to remain at 17.5%. I am afraid that that amendment is illegal under EU law, so we cannot pursue it. Amendment 40 would provide for the Treasury to produce a report on the standard rate of VAT by 4 January 2011. The Chancellor has made it clear that we have no plans in that regard.

Clause 3 makes provision for the standard rate of VAT to increase from 17.5% to 20% on 4 January 2011. That is an unavoidable measure, and I urge the Committee to reject the amendment, which risks the Government's plan to reduce the deficit.

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Mr Gauke: Amendments 35 to 37 aim to remove supplies to charities for non-business purposes from the scope of the VAT increase. Similarly, amendment 56 would mean that the increase would apply only to supplies costing £25,000 or more, and that it would not apply to purchases made by charities for renovations of property or of fuel sold to residents of rural locations. Amendment 57 would add supplies to public authorities to the list to which the increase will not apply and is a little more specific about the type of renovations that would be excluded from the increase.

Both those groups of amendments would be illegal under EU law insofar as they would effectively create further reduced rates of VAT in categories that are not on the list of permitted reduced rates. They would also impose a considerable administrative burden on the businesses supplying the goods in question, as they would mean that any business supplying goods or services would have to ascertain first whether a customer is a charity and, secondly, the use to which the customer would put those goods or services. In the light of the customer's answer to those questions, the VAT rate would be either 17.5 or 20%, unless the supplies were eligible for the reduced rate or the zero rate.

Bob Russell: Will the Minister give way?

Mr Gauke: Before I do, I note the spirit in which my hon. Friend the Member for St Ives (Andrew George) tabled his amendments, in an attempt to probe this matter, so I do not criticise him. He has acknowledged that his proposals were not technically watertight, but they none the less enabled us to debate this matter.

Bob Russell: Can the Minister tell me where the coalition agreement says that charities will be disadvantaged by Government policies? Can he explain what percentage of the total increase in VAT will be borne by the charitable sector?

Mr Gauke: The coalition Government are very keen to support charities. At the moment, charity tax reliefs are worth something like £3 billion a year.

We are looking to encourage charitable giving. However, the essential problem-I am sorry to have to keep coming back to this central point-is that we have a crisis in the public finances. We know that the measure is unwelcome, and it is regrettable that charities, among other groups, will have to pay more in tax and will not be able to recover all of it. There is not a great deal of flexibility in the VAT system. I have to come back to the point that was rightly made by my hon. Friend the Member for Bristol West (Stephen Williams). Employers' national insurance contributions are also going to hit charities hard. Many small charities in my constituency have raised that particular concern, but the fundamental issue is the state of the public finances and the need to address it.

The hon. Member for Wrexham (Ian Lucas) argued that we could increase corporation tax, but I am afraid that that would be short-sighted because it would prevent a strong private sector recovery.

Andrew George: The primary point that I raised was the impact on charities, which is dealt with by proposed subsection (1A)(a) in amendment 57. The Exchequer Secretary said that some of the impact would be ameliorated through gift aid, but he needs to acknowledge that larger charities with the necessary bureaucracy can take advantage of gift aid, but smaller ones more often than not cannot. A number of other charities equally cannot take advantage of it. Is there anything that he can say about ways in which the impact of the VAT rise on charities can be ameliorated?

Mr Gauke: We are looking at what we can do to simplify the gift aid system so that charities of all sizes can make use of it. Some smaller charities do well out of gift aid. We want to do all that we can to strengthen charities, but the fundamental fact is that VAT is the right tax in these circumstances to raise additional revenue. There are restrictions within the VAT system as to what we can do to protect charities from that tax, but the Government as a whole remain committed to assisting charities as much as possible.

I should like to take the opportunity to respond to the comments made by the hon. Member for Bermondsey and Old Southwark (Simon Hughes) and my hon. Friend the Member for St Ives (Andrew George) about the tension between renovation and new build and the incentives for them. I know that the Liberal Democrats have campaigned consistently on that matter for several years. As a Government we will continue to keep it under review. They make their case well.

I am aware that mountain rescue services have drawn the attention of a number of hon. Members to the case for exempting their vehicles from vehicle excise duty or extending their reliefs from VAT. I am sure that all of us in the House have huge respect and admiration for the work of the mountain rescue services and recognise the valuable contribution that they make to the safety of those enjoying the countryside. The case is well understood on both sides of the House, but as the Committee will no doubt be aware, mountain rescue teams, like other search and rescue charities, benefit from VAT reliefs on some but not all goods and services that they purchase. Such charities are also able to purchase free of VAT medicines, medical equipment including first aid kits, splints and stretchers, ambulances and certain vehicles designed to transport disabled people.

The mountain rescue teams also benefit from other VAT zero rates that apply to all charities. All of those zero rates are derogations from the normal EU VAT rules and represent benefits not enjoyed by charities in other member states. The mountain rescue teams estimate that they still pay something like £200,000 in irrecoverable VAT per year. However, it is well understood that there is no scope within the framework of long-standing EU VAT law for relieving more of their purchases from VAT, which is why the previous Government did not do so, despite receiving representations on a number of occasions. It would, therefore, serve no useful purpose to produce a report on the impact of the VAT increase on the service. It is argued that there could be a refund for the VAT costs, which is a public expenditure choice that I am sure the shadow Chief Secretary-formerly the Chief Secretary-was conscious of in his previous post, and we know what happened then.

Bob Russell: Where there's a will, there's way. The Treasury could find a way of offsetting the cost for the mountain rescue services, just as the Labour Government found a way of offsetting the VAT that would have been put on poppies if they had continued with a particular piece of legislation.

The question I put earlier has not been answered. What is the percentage of the VAT increase to be borne by charities in relation to the total increase that will be collected if VAT rises to 20%?

Mr Gauke: It is not possible to answer that question in a precise form.

In the light of the points I have made, I urge my hon. Friend the Member for St Ives and the shadow Chief Secretary to withdraw their amendments.

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Mr Gauke: As we have heard, amendment 38 seeks to take anti-forestalling legislation introduced in the Finance Act 2009 for the reversion of the standard rate to 17.5% on 1 January this year, and use it to prevent forestalling as a result of next January's rate increase. That appears to be a simple approach, but in fact it would render the earlier anti-forestalling provisions inoperative and leave us wide open to a loss of revenue on transactions spanning 1 January 2010. Schedule 2 was closely modelled on the measure used when the rate reverted to 17.5% on 1 January 2010 and is intended to operate in the same way. There are no changes of substance and no hidden amendments. However, the anti-forestalling provisions in last year's Finance Act were specific to the last rate increase and are still required in relation to that increase. Trying to cover both rate increases in one schedule would lead to unnecessarily complex legislation.

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Both last year's anti-forestalling legislation and the draft provisions in the Bill counter forestalling by introducing a supplementary charge to VAT, and so remove the tax advantage. The charge applies where a VAT invoice is issued or prepayment occurs before the rate rise, but where the provision of goods or services is to take place afterwards. Clearly, there could be a large number of transactions where an invoice was issued or a prepayment was made before 1 January 2010, but where the goods or services had not yet been provided. For example, a right to acquire goods at a later date might have been granted in 2009, but not yet taken up. In those circumstances, the amendment would mean that HMRC could not collect a supplementary charge that would otherwise be due under the provisions of the existing Finance Act 2009. This is because that legislation, as amended, would have effect only in relation to the VAT rate change on 4 January 2011.

Furthermore, I am sure that taxpayers find it much easier to refer simply to a single piece of legislation for the upcoming rate increase, rather than risk getting confused by having to refer backwards and forwards between two provisions. Schedule 2 as drafted is clear, and it will be effective in preventing forestalling as a result of the upcoming rate change. Retaining schedule 3 to the Finance Act 2009 without amendment will continue to prevent forestalling in relation to the latest rate change. I appreciate the manner in which the amendment was moved by the shadow Chief Secretary, but I would urge him to withdraw it.

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Mr Gauke: As we have heard, amendments 26 and 27 require both that before the rate increase takes effect the Chancellor must produce a review of existing reliefs for disabled people and that the VAT rate for standard rated goods that are intended to alleviate disability remains at 17.5%.

I congratulate the hon. Member for Pontypridd (Owen Smith) on the manner in which he has set out his points; he obviously brings a great deal of expertise to this issue. I am also grateful to the shadow Chief Secretary, the right hon. Member for Birmingham, Hodge Hill (Mr Byrne), for amendment 47, which, as he says, requires the Government to produce a report on the impact on standard-rated goods for disabled people.

A number of concerns have been raised about the impact of the VAT increase on disabled people. The disabled will also face the increase in the standard rate of VAT, of course. As we have heard, however, and as Members will be aware, much of what such people need in respect of their disability-including medical and surgical appliances, chair or stair lifts, adjustable beds, adaptations to bathrooms and adapted vehicles-is zero rated and will remain so.

Mrs McGuire: With respect, I think that is a very narrow description of disabled people and the extent of their needs. The Exchequer Secretary has adopted a very mechanistic attitude in respect of the goods and services that disabled people need. Did he take any advice from the Government's Office for Disability Issues in assessing the impact of VAT on disabled people?

Mr Gauke: As I have said, many of the particular items that disabled people need are zero rated, and that will remain so. I make no claim that everything that disabled people will need is zero rated, however, and I come back to the point I made in earlier debates: the fact is that we face a crisis in the public finances. I suspect that, when the previous Chancellor was looking at this and proposing an increase in VAT, he wrestled with exactly the same issues that we have.

Malcolm Bruce (Gordon) (LD): Would my hon. Friend care to speculate on what the difference for disabled people would be between a VAT rate of 19% and one of 20%, and on what proposals Labour had to provide relief for the 1% difference?

Mr Gauke: My right hon. Friend puts a very good question and tempting though it is to speculate, I suspect that no particular mitigating proposals had emerged, but perhaps it is not for me to say. The fact is that VAT is one of the few levers available to any Government to raise substantial sums, and that remains the case.

Paul Uppal (Wolverhampton South West) (Con): Much is made by Labour of the regressive nature of the VAT rise. Given that the Labour Government inherited the most benign of economic conditions in 1997 and had a couple of years of good economic performance, why did they not choose to lower the VAT rate when they were in power?

Mr Gauke: Perhaps we will learn about that in one of the forthcoming memoirs-who knows?

My hon. Friend the Member for Birmingham, Yardley (John Hemming) set out the arguments, which I touched on earlier, for looking at expenditure deciles. He also asked perfectly sensible questions about the Government's examining the relationship between changes in the cost of living and uprating measurements. I am sure we will continue to look at these matters closely.

The shadow Chief Secretary asked some detailed and technical questions about annex III of the relevant EU directive, and about reliefs for transport. In order to do justice to those highly technical questions, and given the time, it would be better if I wrote to him, rather than attempting to answer them this evening.

As a result of the current zero rates, the UK has one of the most generous sets of reliefs in Europe for people with disabilities, worth some £400 million a year to disabled people. In the light of that, and given, as we have heard, that this amendment, like the others in the group, is essentially a probing amendment, I ask the hon. Member for Pontypridd to withdraw it.

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