Tax Credits Bill

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Mr. Luff: For the Minister to dismiss the concerns of small businesses, like the one raised by the hon. Member for Teignbridge, as ''perceptions'' is remarkable. They have these ''perceptions'' because their fellow small business men tell them these things.

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It is not perception it is reality that these people are confronted with and that is why they are reluctant to expand.

Dawn Primarolo: I certainly did not intend to suggest that it was not important. It is very important. People's perceptions are as important as the reality because, as the hon. Gentleman suggests, otherwise they do not move on. It is part of the educational role that we need in working with employers and getting information to them to ensure that they are fully aware of the reality and that we can get that message to them. As individuals, we are all familiar with that problem because our own understanding may sometimes not be what it should be.

I am being extremely careful in this important debate to put it in context and not to undermine real concerns that need to be addressed, and I hope the hon. Gentleman accepts that.

Richard Younger-Ross: When people are starting out to build a business, they see it as building an empire. Some have a small hill that they wish to build, some a small mountain range and some think that they can build a business the size of Mount Everest. However, the perception of climbing a mountain is that one starts on gentle slopes, but it gets harder as one climbs higher. Having a heavy burden of taxation and regulation to start with is like coming to a cliff face that is hard to ascend. If regulations are simplified at the early stage, they can be started on the foothills, enabling climbers to get to the top of the mountain.

Dawn Primarolo: I agree with the hon. Gentleman's point about a system that navigates through the foothills to reach the peak. The new tax credits are available to the self-employed, as were the working family and disabled tax credits before them. The information that we have is that one of the benefits, particularly for those starting up their business for the first time—they may have been unemployed and be moving into self-employment—is that the tax credits have provided, and will continue to provide, a crucial certainty for them to calculate in the development of their business.

I accept the issue about helping small businesses to navigate the growth of their business and the first point I make is that the tax credits can assist people in starting up and taking decisions to move into their own business. We are seeing that within the current system.

The sort of things that are already in place, and that would continue, are free help and support, principally for new and small employers; dealing with requests for information; working with them to look at their responsibilities; payroll; and making sure that advice is given at the beginning to ensure that they are fulfilling their obligations in the most efficient way. This support is provided through a range of workshops, internet sites, direct communication and, of course, the one-to-one new business support, which is a mentor system. All this is specifically directed at the point that the hon. Gentleman makes, which is how important it is that that information is available, easily understood and accessible to overcome some of the issues that he has identified.

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In explaining the Government's approach to recognising the requirements and obligations on business, we should consider the tax system and not just the tax credits. The Committee will see that the arguments about why the Government continue to be committed to that principle follow exactly what the hon. Member for Northavon said. We had this discussion before. The Government argued the case for paying working tax credit through the pay packet and remain convinced that that is the correct way to proceed.

When the Revenue notifies employers to pay their employees the working tax credit through the payroll, they will not be required to assess the amount of the tax credit to be paid. The Revenue will do that, and will tell employers when to start paying it. Employers will be given at least 42 days' notice to adjust their payrolls. Hon. Members asked about variation and where employers may move to a current year assessment. The Revenue would need to be satisfied of two issues. Having decided on the new payment, employers would be given the 42 days' minimum notice to prepare their payroll. There should also be at least three consecutive periods in which the tax credit could be made.

Employers will fund the tax credits from the PAYE tax and national insurances contributions, which they already collect, and pay the Inland Revenue monthly or quarterly in arrears, as is currently expected. If the allowances are expected to be insufficient, the employers will not be expected to pay the tax credit from their own cash flow, as is the case with working families tax credit. They will apply to the Inland Revenue for payment in advance of the difference between what was collected and what will be paid. While the annual assessment runs for 12 months, the payment pattern will be clearly notified to the employer in advance and the employer will receive the money. The employer will give additional information on the tax credit payments. Their year-end returns, which they already make for the purposes of PAYE and national insurance, will also account for the total tax credits paid.

Mr. Luff: On a point of information, it took about three months recently for me to get a refund from the Inland Revenue. What is the experience in practice of the mechanisms that the Minister is describing? Have there been complaints from employers about slowness in making the compensatory payments that she identifies?

Dawn Primarolo: I am not aware of any complaints. There is a specific period in which the payment must be made to the employers to ensure that they have received funds before they start paying. That period does not spring to mind, but I am sure that I will have that information for the hon. Gentleman before I sit down, and I will reply to his question before I conclude. The only caveat would be if the employer knows what the expenditure is but does not apply in time. If employers leave it until the day before they are due to pay their employee, there will be problems in ensuring that they had funds available at the time. There is a period within which the employer should

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receive the funds. This is how the system operates now, and we have not experienced any substantial difficulties with it. However, I cannot put my hand on my heart and say that in the hundreds and thousands of cases there might not have been one where something went wrong.


Mr. Clappison: The information that the Minister promised my hon. Friend the Member for Mid-Worcestershire may or may not be available before she sits down. However, will she undertake to make it available before we reach clause 31, where these issues become very important because employers are subject to a regime of strict liability for failing to pay tax credits.

Dawn Primarolo: Indeed. Many of the powers in the Bill have been carried forward from preceding legislation on working families tax credits. That it works well is in no small part due to the fact that it is buttressed by a number of reminders of the consequences of non-compliance.

I can now answer the question from hon. Gentleman the Member for Mid-Worcestershire. The caveat is that employers must apply in time. If they leave it to the last minute, which no one appears to be doing, there will be problems. The employer will have to have the payment at least three days before it is due to the employee. By this, I mean that employers must have money available before payment is transferred to the employee.

We are not aware of any complaints that have been made to us, claiming that this system is not work, or that it does not assist the employers. Obviously, when the arrangements have been known for 12 months, it is a straightforward transfer. It also depends on the time of the pay period. We are talking about transferring the tax credits from the employer three days before the employee's pay period.

Although the general framework is familiar to employers and, as I have said already, they are using it, we took seriously the comments that were made with regard to working families tax credit. We sought, in designing the new tax credits, to go further in the legitimate requirements for employers. We have managed to do this in four main ways. First, claimants will not routinely have to ask their employers for verification of earnings, which is what happens in the current system as we normally work from the previous year's income, which is based on the P60.

Secondly, if an employee receiving working tax credit leaves the employment, the employer will simply stop paying the tax credit. There will no longer be any need for the employer to complete a certificate of payment, as is currently the case. The fact that it is a fixed award will also make a difference. If the employee remains entitled—and that will be obvious because of the fixed 12-month award—it is their responsibility to tell the Revenue the identity of their new employer. The engagement is then made with the new employer.

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Thirdly, because the new tax credits will be awarded annually, there will no longer be the six-month stop and start. That was a troublesome feature which employers wanted to be changed. Finally, the application procedure for employers who need funding has been simplified. Employers will apply at the beginning of each tax year, and the Revenue system will adjust the funding amount paid to them if there is a change in-year. Payments will be made to employers in advance, so they will have certainty.

The Government are not prepared to concede the principle of payment through the payroll, but I hope that I have shown that we continue to consider ways of refining the system and reducing the burden. All the amendments, however, are concerned with not paying the money through employers.

Amendment No. 94 would remove the power to make regulations requiring employers to pay tax credits to their employees. It would make it impossible for payment to be made other than by the board of the Inland Revenue. I have explained why the Government are not attracted to that. It would be odd to amend a clause so that it did not do what it was supposed to, but still to leave it on the statute book. The amendment would be a way of removing clause 24.

Amendments Nos. 36 and 37 would provide that employers had to receive payment of the full economic cost of paying the working tax credit to their employees through the payroll. I think that the hon. Member for Fareham (Mr. Hoban) touched on the relevant point and I shall not elaborate on it, because Committee members will appreciate it immediately. The Government are not attracted to the proposition. We believe that we should look elsewhere to reduce burdens; there are trade-offs. There would have to be a complex system to calculate the economic cost, which could increase the burden on employers, particularly small employers. A complex formula as to what was and was not counted in the calculation would have to be written in legislation. Attempting to create such a system would aggravate the complications that hon. Members seek to alleviate.

As I said initially, it is incumbent on the Government to reduce burdens, streamline the system and support small and large businesses alike. Part of that is ensuring that those businesses flourish in parallel with the development of the work force and the Government's objectives on full employment.

Amendment No. 51 would allow employees to ask for payment to be made into an account, which would be against the principle of payment through the wage packet. I can only repeat what I have said in this and previous debates: I understand the point made by the hon. Member for Northavon, but the Government do not agree with it.

Amendment No. 35 would remove any reference to the sort of provisions that may be made in regulations under clause 24. I am puzzled as to why hon. Members should propose such an amendment when they have argued that the provisions should be included in the Bill. It goes exactly against what the hon. Member for

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Arundel and South Downs has argued in relation to regulations. It is probably a glitch in the drafting of the amendment.

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