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Page 4, line 7, at end insert--
("( ) for the funding by the Board of an additional sum (calculated as a percentage of the tax credit paid by an employer) to be set off (as provided in paragraph (d)) by, or paid to, employers or any category of employers by way of compensation for the administration cost of paying tax credits;")

The noble Lord said: My Lords, in moving Amendment No. 19 I should like to speak at the same time to Amendment No. 20. These are probing amendments which will provide the House with the chance to debate the administrative burdens of the WFTC on business and to hear the Minister's reply-- I am not certain who is to respond to the debate--in the light of a recent and sensible comment by Jack Cunningham. In a speech to the Social Market Foundation on the new government approach to regulation and reform of the Regulatory Impact Unit, he said that,


Small firms are concerned at the administration costs of paying the credits, and I hope that the Minister will take account of their concerns. The time and paperwork involved in being unpaid tax collectors are ever-increasing and weigh disproportionately on small firms. These amendments would allow for small firms to be reimbursed their costs, which is commonplace on the Continent.

Amendment No. 20 proposes the funding of the costs of employers of less than 500 employees. We have chosen the figure of 500, which is the CBI's definition of a small and medium-sized enterprise. Small businesses in particular are not attempting to avoid their responsibilities. Many small firms simply do not have the resources or back-up to administer the system effectively. Large firms have payroll systems and

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personnel departments, but this kind of work becomes a nightmare on the kitchen table for a small business owner.

We wish to ensure that when employers are asked to administer these tax credits the system is workable. All that will happen is that smaller firms will have to seek expensive professional help or divert resources and manpower from core activities to comply with this requirement and the other burdens of legislation that affect them. We do not feel that this can possibly pass the test set by Jack Cunningham.

At the rate the Government are going, businessmen in small companies will cease to be entrepreneurs as they will have to spend so much time as unpaid administrators of the Government's welfare system. The Minister has just maintained that the work to be done by employers in administering tax credits is minimal. That is disputed by employers' organisations, who point out that employers will have to log each start and stop notice so as to take the right action on each pay day and insert the correct amount on the payslip of each claimant. They will then have to add up the total tax credits paid to all employees on any one pay day and deduct that total from the PAYE tax and national insurance that they have to pay to the Revenue. An employer who will be out of pocket and therefore able to claim an advance of money from the Revenue will have to estimate the amount needed and get the evidence together for his claim.

In addition, there will be mistakes and the employer will be blamed. An employer may pay the wrong person on the incorrect instructions of the Revenue and will have to spend more time correcting that mistake. Small business organisations are incensed by the misleading statement that the Revenue rather than the employer will do all the work. One suggested to me that Ministers should be conscripted into small companies' payroll departments for a month and they would then understand. I beg to move.

Baroness Carnegy of Lour: My Lords, it seems to me that the Government have accepted the principle of reimbursing employers for the work that they do in relation to benefits in the case of maternity benefit. I remember operating the system for somebody on maternity leave, paying her salary while on leave and claiming it back from the department. Extra was paid back to cover the administration that I had had to undertake. I forget the proportion but I regarded it as very reasonable and human of the department. There is a principle within the Department of Social Security that may be related to this point.

Lord Goodhart: My Lords, we on these Benches--in view of the absence of my noble friends perhaps I should say "I"--recognise the problems of small businesses. The problem that this Bill creates for small employers is, at any rate for the time being--although I fear what may happen when this Bill goes back to another place--much reduced by the amendment passed at Committee stage to exclude small employers from liability to make payments of tax credits through the payroll.

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I find a good deal of difficulty in supporting Amendment No. 20, or Amendments Nos. 21 to 23, which have not yet been spoken to but which I would have difficulty with for the same reason. Apparently they are all based on the idea of refunding to the employer the actual costs incurred. I believe that that would involve massive bureaucracy and an opportunity for fraud and would give employers no incentive to minimise their administrative costs. Further, Amendment No. 20 gives help to quite large employers who could well afford to carry the costs involved. A business with, say, 499 employees could have a wages bill comfortably in excess of £10 million a year.

Amendment No. 19 seems a good deal better, perhaps not surprisingly, as it is similar to an amendment which I tabled at Committee stage. It proposes to set a percentage addition to the tax credit payments so that the calculation is simple and an incentive to minimise costs is preserved. That idea is based on the funding system for the administrative costs of statutory maternity pay. The amendment gives the Government power to decide where the dividing line falls between the small and large employer and a discretion in deciding the appropriate percentage rate.

The Government have argued that there is no compensation for the cost of administering PAYE or national insurance contributions. That is perfectly true. But, in that case, why make an exception for statutory maternity pay? The answer must be pragmatic. An employer of any size cannot escape paying PAYE or national insurance contributions. The only employers who do not do so are those employing perhaps a gardener, or a cleaner in the house, for a few hours a week. Small employers employing up to 10 people can seek to avoid employing pregnant women, or women likely to become pregnant. So they have had their costs refunded in order to avoid the disincentive of employing those members of their staff.

For the same reason, we should not give small employers an incentive to avoid payment of tax credits through the payroll. In addition, PAYE and NIC deductions compensate employers to a limited extent by the cash flow effect. The payment of the deducted contribution occurs some time after the payment of the wages. That cash flow effect is reversed in the case of tax credits.

However, I am somewhat ambivalent about Amendment No. 19 at this stage. The exclusion which we have already achieved of employers with fewer than 10 employees makes the amendment largely unnecessary. That was why we did not table our amendment again on Report. We look on it effectively as an alternative to the amendment passed during Committee stage.

Lord McIntosh of Haringey: My Lords, I was amused by the suggestion of the noble Lord, Lord Astor, that Ministers responsible should be conscripted to the payroll department of small firms for a month. It was not just the idea that small firms have payroll departments--they do not; the boss does the work--but because I have done so not just for a month but for many years. I have to repeat what I have said in previous

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stages of the Bill. The burden which is supposed to be imposed on small employers from the tax credit proposals is very small indeed. The burden imposed by the requirement on all employers to operate the PAYE and national insurance contribution system is substantially larger than what is proposed in the Bill. And even that is dwarfed by the burden imposed by value added tax, which is a transaction-based activity which requires every financial transaction to be recorded and calculated for a VAT return on a quarterly basis. As a matter of practical experience, I cannot accept the accusations about the burden of tax credits on small employers.

I have difficulty in speaking only to Amendments Nos. 19 and 20. Amendment No. 18, which was withdrawn, and Amendment No. 23 are clearly alternatives which set a threshold of the amount of the annual national insurance contribution payments. Amendments Nos. 20 to 22--they appear, illogically, to be in different groups--are three alternatives which set the threshold of the number of employees. Amendment No. 19--it was not moved by the Liberal Democrats in Committee, not because a previous amendment had been carried but because the Liberal Democrat Front Bench was empty at the time and no one was present to move it--seeks to achieve exactly the same objective by calculating the sum as a percentage of the tax credit paid by the employer. I have only to speak briefly of the cost of the amendments to make it clear why the Government cannot accept them. Amendment No. 19 would cost £35 million per 1 per cent of compensation paid. Amendment No. 20 would cost £60 million.


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