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Baroness Hollis of Heigham: When the noble Lord, Lord Higgins, began I was not sure whether we were going to hear a speech on semantics or a Second Reading speech. I believe that his speech moved between the two. The amendments seek to change the title of "tax credit" and to remove Schedule 1. The noble Lord said that the Bill starts off on the wrong foot. On the contrary. The change in title states exactly what the Bill seeks to do. The noble Baroness, Lady Carnegy of Lour, made the point for me very well, and that was reinforced by my noble friend Lady Turner of Camden.

The Bill will give, via the Inland Revenue and the pay packet, support for low wages or low hours to those in work and will therefore make more attractive entering

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into work and staying in work. It allows people to overcome the unemployment trap of moving off benefit and into work--and, within work, it will allow people to keep more of every pound that they earn. As the credit will be run by the Inland Revenue and paid through the pay packet, it is proper, appropriate and transparent to call it a tax credit. The change to WFTC and DPTC asserts their new character and puts them in the context of work and as a reward for work.

Baroness Carnegy of Lour: The noble Baroness felt that I was in agreement with her; indeed I was on one aspect of what the government are trying do. She said that it is appropriate to call this a tax credit. Does she really believe it appropriate for the Government of this country deliberately to call this provision something which it is not? It is not a credit against tax. Pay, tax and net pay are shown on the payslip; then this benefit is added. It is simply recorded on the same piece of paper. Why does the Minister feel that it is legitimate to call it a tax credit?

Baroness Hollis: I hoped that I had made the point that it is being run by the Inland Revenue and will come through the pay packet. Therefore it is not a benefit being run by DSS and paid to the person at home as income support. There is all the difference in the world between benefits such as income support and JSA, which are paid by the DSS to someone who is out of work and at home, and a benefit which then becomes a tax credit, run by the Inland Revenue and paid through the pay packet, making the perception of the value of work, particularly entry wages, that much more obvious to people. In other words, to address the first point made by the noble Lord, Lord Higgins, this is not merely a re-badging exercise.

Lord Swinfen: The noble Baroness says that this is not a benefit, but a tax credit. It is a benefit to the person who receives it. It is not strictly a tax credit; it is a benefit. It has to be shown under EU rules and regulations as government expenditure. What will it be shown as? Surely it is a social security benefit.

Baroness Hollis of Heigham: Of course this is a benefit to people in the same way as wonderful music is a benefit to people. But if the noble Lord means by "benefit"that it is a social security benefit, no, it is not. It is an Inland Revenue tax credit being paid through the wage packet.

Lord Peston: Perhaps I may interrupt my noble friend so that she can help to clarify this point to all of us. Am I right in assuming that the putative take-home pay form will include a calculation stating the tax that a person would have paid without the credit, that a figure is deducted, and the result is the net income? It clearly leaves a person with a different net income, and the reason is clearly stated. It is not added as benefit. Is that correct? It is a tax credit, in precisely the form stated by my noble friend.

Baroness Carnegy of Lour: Will the Minister explain that point carefully? My understanding was

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different from that of the noble Lord, Lord Peston. I thought that a person's gross pay would be on the payslip, as would his or her tax contribution and net pay, and below that would be this benefit. Is that correct?

Baroness Hollis of Heigham: As at present, gross and net pay will appear on the payslip, as will deductions for national insurance, pensions and so on, together with the addition of the tax credit. So the payslip will include the deductions and the addition, and the pay going to the individual will be the sum total. But because that transaction cannot be done through PAYE, it will appear as a separate entry on the payslip. I hope that the point is now clear.

I return to the point made by the noble Lord, Lord Higgins. Basically, the noble Lord suggested that this is a re-badging exercise without substance. I want to challenge him on that point. This provision begins the process of bringing together some of the taxes and benefits in our system to ensure that work pays. It will reduce the marginal tax rates for over 70 per cent of families concerned--that is, 500,000. Two-thirds of people will, for the first time, see their marginal tax rates fall below 70 per cent. This measure reduces the absurdity that presently exists; namely, that 45 per cent. of families presently have to be in receipt of family credit to receive income support; and we then proceed to tax part of the value of that amount away; whereas in future 97 per cent of people on working families tax credit will not be liable to income tax.

As the noble Baroness, Lady Carnegy, and my noble friend Lady Turner said, this provision reduces--

Lord Goodhart: Will the Minister explain how it is that 97 per cent will not be liable to income tax when there will be a perfectly clear figure on their payslips for the PAYE deduction?

3.45 p.m.

Baroness Hollis of Heigham: The increased generosity of WFTC and DPTC means that 97 per cent. of claimants will not now pay income tax as a result of this measure. If I have any additional information I will provide it for the noble Lord, but that is my understanding. At present, 45 per cent. of those on family credit have part of the value of that credit taxed away. That will not be the case in future.

The change of title is not re-badging. It indicates that we are approaching the issue of making work pay and that once people are in work they will be able to keep more of their pay through a different system and a different approach. We are no longer talking about income support, but about support for low-paid work and low wages and families and lone parents in those work situations.

It seems that behind these amendments is the suggestion by noble Lords opposite that tax credit should not be introduced but should remain as benefits. In other words, their intention is to undermine the aim of producing a clear link with work, so that those who move into relatively low-paid jobs with relatively low

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entry wages will nonetheless see a clear advantage from moving into work. The amendments would achieve nothing, certainly not in terms of the many people on low to middle income who will benefit from tax credits. We are determined to provide them with essential support by making sure that work pays.

The other amendment linked with these proposals proposes that Schedule 1 should not be included in the Bill. It may be helpful if I explain the purpose of Schedule 1. This schedule has its references in primary legislation where the replacement of family credit by WFTC and disability working allowance with DPTC will take place. The tax credits build on the existing benefits. The most efficient way of doing that in legislation is to build on the current social security provisions for these benefits. Contrary to the noble Lord's assertion, this was indeed how Martin Taylor recommended that the Government should proceed. Clause 1 of the Bill effectively converts the benefits into tax credits. Schedule 1 provides guidance for the reader of the legislation. It is not strictly necessary but it will make the matter much clearer to those concerned.

The first point raised was that this was merely a re-badging exercise. I have tried to show that, on the contrary, not only in a mechanical sense is it being run by the Inland Revenue and paid through the pay packet, but, more substantially, it will help to overcome the unemployment and poverty traps which have hung like albatrosses round the necks of those who struggle to survive on low wages.

The second point raised by the noble Lord, Lord Goodhart, related to public accountancy and public expenditure. The noble Lord argued that because the amount is quoted as public expenditure from the point of view of European conventions, that indicates that it remains a benefit rather than a tax credit.

We discussed this point to some extent at Second Reading. I remind the noble Lord that we are treating this matter, in terms of accountancy, presentation and the Red Book, and European standard terms, in exactly the same way as MIRAS. I do not think that many noble Lords would regard MIRAS as a social benefit; they would regard it as effectively tax credit support for housing costs. These benefits will be treated in exactly the same way.

Thirdly, noble Lords opposite seemed to imply that if, however, the tax credit had been paid not as an additional entry on the payslip but through PAYE itself, that would have reinforced the argument that it was indeed a tax credit, and some of the opposition to the proposal might have been withdrawn, as the position would have been more obvious. That may be so. It is an honourable question to ask. It is one that puzzled me when I first came to this matter. The point was discussed at considerable length in consultation with employers. If it could have been done, it would have been a more attractive approach--not in terms of meaning and whether or not it is a tax credit, but in terms of presentation to the people concerned. It would have been more obviously attractive.

The simple answer is that tax credits are not being handled this way because PAYE coding cannot deliver everything that we currently want to achieve with

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WFTC and DPTC. The Treasury and the Inland Revenue understood this from the outset. It may be helpful if I share their reasoning with the Committee.

Noble Lords will appreciate that, building as it does on family credit, as Martin Taylor recommended, the tax credits will be set in advance, using a snapshot of family circumstances at, and just prior to, the date of claim. That helps set tax credits for the next 26 weeks. In order to deliver the same certainty of income that was so valued in family credit, the tax credit awards will be for a fixed amount for a set period running from the date of claim.

But PAYE operates through the tax year constantly to adjust to changing circumstances, so that at the end of the tax year (by 5th April) the right amount of tax has been paid. The technical term is "cumulation". It works in the following way. The system looks in each pay period at how much has been earned from the beginning of the tax year; it allocates the correct fraction of the taxpayer's allowances for the entire year; it calculates the net taxable income from the beginning of the tax year and calculates the tax that should be paid on that. The payroll system then compares what ought to have been deducted from that income by the end of the pay period in question with how much has been deducted, and deducts or repays the difference.

It is also obviously the case that such a system is clearly unworkable for the lower paid who are entitled to working families' tax credit but do not pay tax because they are below the lower earnings limit but are, with 16 hours of minimum wage per week, entitled to claim working families' tax credit. We could not pay them a tax credit through PAYE if there were no PAYE system for that employee.

I suppose that, alternatively, the amendment proposes that 80,000 employers who are currently exempt because they employ someone for fewer than 16 hours a week in their household, perhaps as a cleaner or a gardener, who works for several employers and therefore works for more than 16 hours a week and is entitled to WFTC as a result, would come within the system, which they currently do not.

There is thus a real problem in applying this system either to employers who individually employ someone for fewer than 16 hours a week or to people who currently do not pay tax because they are below the lower earnings limit.

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