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Session 2001- 02
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Standing Committee Debates
Tax Credits Bill

Tax Credits Bill

Column Number: 133

Standing Committee A

Tuesday 22 January 2002


[Mr. Jimmy Hood in the Chair]

Tax Credits Bill

10.30 am

Mr. Peter Luff (Mid-Worcestershire): On a point of order, Mr. Hood. Last week we had a useful debate on the regulation-making powers in clause 10. I suggested that although the Bill contains some 19 regulatory powers it would be helpful for the good conduct of the Committee if we tried to avoid having too many debates about them, and your co-Chairman, Mr. Beard, agreed. Then, over the weekend, I saw a report in The Sunday Telegraph stating that the Government have used regulation-making powers to a record-breaking degree—4,155 times last year, which is an increase of one third on the previous record in 1997. The article says:

    ''Although MPs can vote against statutory instruments, in practice this never happens . . . MPs are now largely irrelevant to the way our laws are made.''

So far we have debated some nine regulation-making powers, three of which went through on the nod because of the guillotine, and there are about seven coming up in relation to our proceedings today and possibly on Thursday. The exact number depends on how one defines a regulation-making power; some are very narrow and some are very broad. Clause 23 certainly contains regulation-making powers.

In view of the revelation that the Government are using regulation-making powers on such a massive scale, Mr. Hood, what is your view on clause stand part debates in that respect? The Bill contains an enormous range of such powers, so will you allow us to test the Minister on the rationale behind each one?

The Paymaster General (Dawn Primarolo): Further to that point of order, Mr. Hood. The hon. Gentleman's question was addressed to you, and you decide on how best to handle our debates. However, I may be able to help the Committee. I have not seen the article that he mentioned, but our first concern is to ensure that draft amendments are available. We will discuss regulatory powers in the context of clauses 23 and 24—

The Chairman: Order. The Minister is responding to a matter for debate that was raised by the hon. Gentleman in his point of order. Revelations in the press, regardless of whether they are factual, are not a matter for the Chair, and the hon. Gentleman should address his remarks to the Minister. In relation to clause stand part debates, I will consider them on their merits, as I always do.

Column Number: 134

Clause 23


Mr. Howard Flight (Arundel and South Downs): I beg to move amendment No. 94, in page 16, line 19, leave out 'Subject to section 24'.

The Chairman: With this it will be convenient to take the following:

Amendment No. 36, in clause 24, page 16, line 28, leave out 'Regulations may' and insert

    'Nothing in this Act shall entitle regulations to'.

Amendment No. 37, in clause 24, page 16, line 30, at end insert

    'unless payment is made to such employers equal to the full economic cost to the employer of doing so.'.

Amendment No. 51, in clause 24, page 16, line 30, at end insert

    'except where an employee requests payment into an account notified to the Board or via a Post Office, in which case the employee shall be entitled to receive payment in this manner'.

Amendment No. 35, in clause 24, page 16, line 31, leave out subsections (2) to (7).

Amendment No. 104, in clause 24, page 17, line 2, at end insert

    'provided the Board shall reimburse the full costs of so doing to employers.'.

Clause 24 stand part.

Mr. Flight: I welcome you back to the Chair, Mr. Hood.

Clauses 23 and 24 provide for child tax credits to be paid directly to the carer and for working tax credits to be paid by employers. They do not explicitly say what happens to the large numbers of self-employed people, but I assume that the intent is that they will be paid directly by the Revenue.

In the group of amendments that we are addressing, our amendments take two different lines and raise two separate issues. Amendments Nos. 36 and 35 would provide that working tax credits were not paid by employers but were paid directly to claimants. Amendment No. 37 raises the issue of remunerating employers for the economic costs incurred in making working tax credit payments, and amendment No. 104 raises the issue of the costs incurred in relation to the provision of information to employees. Liberal amendment No. 51 goes down the middle by stating that employees should be permitted to request direct payment to their banks or post office accounts.

There is some important background information to run through. There are currently about 5 million households getting support directly from the tax system. That involves around 300,000 employers in making payments, especially under the working families tax credit. The Carter review, which the Government instigated, found that employers have incurred £220 million of costs since these arrangements were introduced. The Bill extends tax credits to couples and individuals without children, which the Institute for Fiscal Studies estimates would add 250,000 single people and 170,000 working couples to those being paid tax credits by employer.

Column Number: 135

Overall, the total of 5 million households receiving support from the tax system would be raised to 6 million.

Mr. Steve Webb (Northavon): One thing that struck me when I read those estimates was that the IFS could not have known the rate that the Government would pay for a second adult, which we have discovered that they plan to do, and that it could not have known the amount for lone parents through the working tax credit. Both those additions to the value of the credit will bring on extra people beyond those estimates.

Mr. Flight: I thank the hon. Gentleman for that additional point. We are addressing a framework Bill, we do not know its provisions and that seems wrong to me and to the hon. Gentleman. The total number of households affected may be more than 6 million. The Government have argued that because child tax credits will be paid directly to the main carer this will offset the additional numbers of people with whom employers must deal under working tax credits. It is unclear whether that follows, but it is their line of defence.

Amendments Nos. 35 and 36 take the route of providing for all tax credits, including working tax credits, to be paid directly. The logic behind this is separate from the issue of the costs to business. On Second Reading I referred to the consequence of that, which will be that people's pay packets will become a social wage that is unrelated to the economic reward for the job that they are doing. I am concerned, and the Government should be concerned, that this sends the wrong signal. There must be clear monetary signals if people are to be motivated to enhance their skills. If we are to achieve better productivity growth we need a more skilled population. In the past, people such as the parents of Lady Castle, who were coal miners in Wales, knew that to obtain skills was to progress in life. Happily, much of the Asian immigrant community knows that message, and its members get themselves more skills than other parts of the population.

The Government have admitted in their reports on skills that we are lagging far behind other developed economies. They predict that jobs will go vacant because of a lack of skill growth in the economy, and they point out that the proportion of the work force with intermediate vocational skills is one of the worst in the Organisation for Economic Co-operation and Development area. I put it to the Minister that there is a contradiction in that the Chancellor is saying that the top priority is to upskill to obtain productivity growth, which has declined, but we are making arrangements for pay that will send people the wrong signals.

The Government have argued that tax credits must be paid through the pay packet because of the stigma associated with the alternatives, but the inquiries that have been made point in the other direction. Employees prefer to receive such payments directly because they do not want either their employers or other members of staff getting to know their personal affairs.

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There is an issue—it is not major—about employees taking a credit risk on employers. If employers have received money from the Revenue and go bust before they have paid it out, employees could suffer.

In principle, the biggest concern is that there is a Speenhamland element in that there will be an obvious disincentive to employers to up pay where they are able to give out pay checks that include a significant element of tax credit, which is obviously a form of negative income tax. Psychologically, if not in market terms, it will lead to downward pressure on pay, especially in areas where pay is low.

There is another fundamental point that underlies the amendments, which are intended to tease out from the Government how they will remunerate employers for their work. The Bill provides for a negative income tax, and, as the Confederation of British Industry has made clear, the Government indicated to it at the outset that tax credits would be administered by a tax coding system. We discussed tax coding last week, but the CBI and the Government have deemed it to be impractical, and I should like to know why. In principle, a system of tax coding would avoid muddle and fraud because annual negative income tax returns would provide the evidence, which would be different from payroll information, which the Revenue would need. That would enable the continuity of payment that the Government seek, just as a system of coding and tax returns would make easier the payment of tax on a rolling basis.

There is a probing question implicit in the amendments: why is a negative income tax system impossible? Is it the Government's intention to work towards that? As the CBI has argued, it would be the best solution to the problem.

Amendments Nos. 37 and 104 are probing amendments. The Government commissioned the Carter review, and they have indicated that they will respond to the issue that it raises, namely their imposition of costs on all employers for administering tax credits. What are the Government proposing? They cannot use the argument that they do not want to reveal the rates of tax credits because that will be announced in the Budget. The Government are imposing burdens on employers and have said that perhaps they want to alleviate them, so it is reasonable to want to know what alleviation the Government are considering following the Carter review.

10.45 am

The Minister has argued that moving to 12 months, rather than six months, might ease the burden on employers. The employer view, as expressed by the CBI, is to the contrary: because of the 12-month gap, people whose circumstances change materially during the year will advise the Revenue accordingly and will, as a result, have changed tax credits. Although the employer will be given information by the Revenue, every time that that happens they will have to change their computer programming to pay out a different individual amount to the employees who are affected.

The Government's better regulation task force indicated its worries about the impact of tax credit costs and time burdens on small business. Such

Column Number: 137

businesses must focus on their business to survive and they are already burdened with excessive regulation. Here we have not just a regulation, but a task and small businesses do not necessarily have the money to easily subcontract their payrolls. With staff who work differential hours, they are likely to be faced with changes in the tax credit arrangements during the year. We would like to hear what the Government plan to do about the problem. We also register the major contradiction between an economy that ends up operating with a social wage and a Government policy that wants higher productivity growth and people to upskill themselves so that they become more valuable. The Government should listen to employees who clearly do not want to be paid their tax credits in the pay packet.


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