Examination of witnesses (Questions 74
- 99)
TUESDAY 23 JUNE 1998
MR RICHARD
BARON and MR
BILL KNOX
Chairman
74. Good morning, ladies and gentlemen.
May I open the public proceedings this morning. The Committee
is returning to phase 3 of the tax and benefits inquiry which
we started earlier in the year, and we are delighted to welcome
our two witnesses this morning, Mr Richard Baron from the Institute
of Directors, who is the Deputy Head of the Policy Unit there,
and Mr Bill Knox, the Federation of Small Businesses Employment
Affairs Chairman, who tells me he has a very important engagement
at eight o'clock this evening in front of the television set.
I can tell him he will not be alone. The session will finish before
eight o'clock this evening. Richard and Bill, you are both experienced
individuals in this kind of activity and we are grateful to you
for your memoranda, which have been very helpful in setting the
context of what your respective views are. I wanted to ask you
both if you would help us by explaining exactly how you see the
merits of a Tax Credit. You have done that to a certain extent
in your respective documents, for which, as I say, we are very
grateful, but if I could put the question to you: I think you
were probably both around at the time, though maybe not in your
present positions, in 1988 when Mr Norman Fowler tried something
of the same thing when Family Income Supplement became Family
Credit and the Government were quite robust in saying that they
were going to do the reform in a way that ran into some quite
mighty opposition in the House of Lords as a result of the objections
from organisations representing women's interests in terms of
who was to receive the payment, and secondly, and more appropriately
as far as you are concerned, by the business community, who felt
that the change at that time was inimical to their members' interests.
Really the first question this morning has to be, what is different
about now and are the objections that were sustained in 1988 not
going to run up against the same kind of problems when the legislation
is implemented in this context? Could I ask you both to say a
word about the merits, as you see them, of a Tax Credit, in so
far as they go, and to comment on the differences between the
1988 situation and where we are now? Could I invite Richard maybe
to open the batting?
(Mr Baron) Yes. I think is a very good question,
what are the merits, because it is not to me at all clear what
they are. I am aware that the Working Families Tax Credit is part
of the Government's strategy to tackle unemployment and to tackle
excessive dependence on benefits, and the idea appears to be that
if you get your benefit money through your pay slip it will make
it very visible that you are better off in work than you are out
of work. I have not seen any convincing psychological evidence
that it will actually achieve that effect. I suspect that evidence
on those lines is very hard to get hold of because it is very
hard to do any kind of controlled experiment on how people's economic
behaviour changes when you change the way in which you give them
some money. So I am very unclear about what the real benefits
are. I am very clear on what the downside is, that to deliver
Family Credit revamped as Working Families Tax Credit through
the pay slip is going to be a huge amount of hassle, mainly because
the pay roll system and the PAYE system are simply not designed
to give people money. They never have been; they have been designed
to take money off people in the form of tax, possibly zero tax,
but not actually to give money back. So it is going to be very
difficult. I am not aware of what arguments were put forward in
1988. I am afraid I was not taking an interest in these matters
at that time, but to the extent that they were administrative
concerns that this would just be too much for the Revenue through
employers to cope with, I think those concerns are equally valid
today.
(Mr Knox) I think the perceived benefits are hopefully
twofold, in the Government's opinion. One is that the psychological
element that Richard talked about is realistic. People do feel
that they are earning something and that is one aspect of it.
The other aspect, of course, is to break down the barriers between
unemployment and employment. Those are two, what I call perceived
benefits, but once we go into it quite deeply, as we have done
in the Working Committee with the Inland Revenue, we are finding
more and more complexities. One of the things I did was to speak
to some of the people who work for me and suggest various options
and not one of them suited. I had one girl in particular who has
two children. She was not happy anyway with my knowing her circumstances.
So there might even be a downside in the psychological aspect
of it. From an employer's point of view there is another aspect,
that if we are handling what could be fairly bureaucratic eventually,
and we are employing new people and one of the people comes in
front of us, we actually might find that we discriminate, knowingly
or unknowingly, against that person and I see a danger in people
who are already trapped in this no-work situation finding it even
more difficult to find work. They may attune themselves to working
but the employer might decide they do not wish to be involved.
So I think that is one of the very quick downsides when we look
at the broad strategy, although we can appreciate in Taylor's
report that he felt it absolutely necessary that the system has
to be changed because there is a trap and too many people are
in the trap. In fact, we find our employers would be quite happy
with that whole approach that we have to try to get people out
of unemployment for a whole variety of reasons. It is good for
the country in that it is better to have people working than not
working psychologically. It is also good in the tax sense that
people working are paying tax rather than receiving benefit. So
we agree with the general trend that is in the Taylor report but
we worry very much, as employers, about various aspects of it.
75. One of the perceived merits that the
Government have put forward is the reduction in the stigma that
might attach to claiming a Family Credit as opposed to being in
receipt of a Tax Credit. Does either of you have strong views
about whether there are any benefits in the perceived reduction
in the stigma in the proposed change that the Government are bringing
forward?
(Mr Baron) I do not think there will be any perceived
reduction in the stigma at the point of claim because claimants
will still have to claim. They will still have to fill in a form
which will go to the Inland Revenue rather than the Benefits Agency.
I do not suppose that will make a great deal of difference. If
there is a reduction in the stigma it must be at the point of
actually collecting the money because it will come to you automatically
through your pay slip rather than your getting a Giro and going
and cashing it, but the claim and the claim form are still going
to be there.
(Mr Knox) In fact, there could be the added stigma
of being an employee who receives, and knowingly receives, benefit
within the workplace.
76. A final question from me: tell us a
wee bit about how you feel you are getting on with the Inland
Revenue Working Party. It is called the Working Party, Working
Committee? What is it called?
(Mr Baron) I think it is called the Working Group.
77. From a business perspective, how is
that working? Are you getting your points taken account of? Do
you feel that you are making any kind of impression? Is it going
anywhere or are there still a lot of problems to solve? How are
you finding that is actually operating?
(Mr Baron) I think it is going very well. I think
the Revenue are taking the administrative problems very seriously
and they are determined, given that ministers have decided the
policy, to construct a system that works. They do not want a system
which falls down. So I think the Revenue are taking our points
on board but they working within an existing PAYE system and constraints
set by policy and there is a limit to what they can deliver.
(Mr Knox) I think what we are facing in the Committee
is an element of reality, that there is only one way to go once
a political decision has been made. I think that is the problem,
that we are finding that there is not a great deal of flexibility,
and what we are doing is probably knocking down some of the options
that the Government do not want in within the Committee. One of
the options was the Pay As You Earn system, and we have a paper
at the moment which is not necessarily confidential but released
to us by the Revenue, which did show that if we added Working
Families Tax Credit to the Pay As You Earn system, it did create
an imbalance and it actually knocked it out of kilter after the
six weeks, and we have to keep revising it.
78. Do you mean in terms of an individual's
balance of tax and credit?
(Mr Knox) That is right, yes.
79. It goes out of kilter in six weeks?
(Mr Knox) Six weeks. That was the figure.
80. On an individual basis?
(Mr Knox) Yes.
Miss Kirkbride
81. Do you mean by "out of kilter"
that there is revenue lost?
(Mr Knox) It is distorted within a period of six
weeks. If it had stayed as a single benefit payment and the tax
taken off, it would have come to a different figure from the figure
that we reach after six weeks, and there is quite a detailed,
complex paper that took us to that conclusion that the Revenue
worked on for quite a few weeks. We did not think it was possible
for this to happen but we could not come to any other conclusion
once we had read the paper. Our hoped-for situation was that the
benefit would be paid through the Pay As You Earn system. The
Revenue say it is totally impossible. We have not managed to counter
that argument yet.
Chairman
82. I think Chris and Patricia both have
supplementaries on this, but just a final, final question from
me. Is the timescale of this realistic?
(Mr Knox) No, far too quick.
(Mr Baron) It is not impossible to get it done
within the timescale, to start paying through the pay slip by
April 2000, but it is extremely tight, especially given that the
Revenue have a lot else on their plate at the same time.
(Mr Knox) The trouble is, if it is not right we
are going to end up with problems come next April. We are saying
that now and we have asked the Government to step back a bit,
but they actually say that the timetable is longer than they wished
it to be.
Mr Pond
83. Very briefly, for Richard, if I may,
I am slightly puzzled on the stigma issue. You said that one of
the reasons why the stigma would not be necessarily reduced is
that a claim form would still have to be completed, and I am puzzled
as to why that should create more stigma than, for instance, completing
a tax return. I am also slightly puzzled as to why it would be
stigmatising to receive Working Families Tax Credit but not other
forms of tax relief. Could you talk us through that a bit further?
(Mr Baron) On the first point, the claim form,
I made that point because I understood that is where the current
stigma is perceived to come from, actually claiming the benefit.
Maybe that is not so. If there is no current stigma from making
the claim, then obviously transferring to a claim form that goes
to a different address does not change anything, does not introduce
any new stigma. So I do not think it introduces any new stigma
but I do not think it takes any away.
84. Just to press you on the point, the
point I am making is, should there be greater stigma from filling
in a WFTC form than there is from filling out a tax return which
gives you access then to various tax reliefs and allowances?
(Mr Baron) I see the point. You are comparing
it with a tax return. I think there will be as long as the payment
that the claimant is getting from the Government is perceived
as a benefit, is perceived as a hand-out, whatever you want to
call it. It is, I believe, part of the Government's strategy to
remove the perception of it as a benefit but, as Bill has just
explained, it is not going to be possible to deliver it through
adjusting a PAYE code. You are going to have still on your pay
slip gross pay minus tax equals net pay plus Working Families
Tax Credit, £50 or £100 or whatever, equals take-home
pay. So it is not going to vanish into the tax system. It is still
going to be there on your pay slip as a hand-out, and I would
question, given that, whether one can take away the perception
of it as a benefit or, indeed, whether one should take away the
perception of it as a benefit. It is still cash coming from the
state to the individual.
Chairman: May we turn
to the whole question of what it is reasonable to expect employers
to do in these kinds of situation. Patricia has some questions
to put on that.
Ms Hewitt: What I
would like to do first, Chairman, is come back to the point about
this extremely interesting Inland Revenue memorandum. First of
all, Chairman, could we ask for a copy of that to be made available
to the Committee?
Chairman: I think
we should because I would like to ask the same question, but I
do not think we can ask our witnesses this morning to make it
available.
Ms Hewitt: No, that
was a point to you, that the Committee ask for that.
Chairman: I agree
with that.
Ms Hewitt
85. What I wanted to ask our witnesses is
this, since you have been discussing this paper, because I am
trying to understand why a Tax Credit should lead to this distortion,
particularly because when we saw Martin Taylor last week he was
certainly talking in terms of a PAYE system, a cumulative basis,
where, just as you were saying, Mr Baron, you would deduct tax
and national insurance and then add any remaining credit and that
would give you the net pay. It seems to me there are two different
situations. One is where over a period of, say, six months or
a whole tax year, the wages are unchanged. You pay the same wage
every week or every month and you deduct the same tax and national
insurance every week or every month and you pay the same credit
every week or every month. That is one situation. The other one
is where the wages fluctuate and so you have some variation there,
so you have a different gross, you therefore have a different
income tax and NIC deduction, and, therefore, with the tax credit
paid through PAYE you have a different credit, whereas under the
Family Credit system the six-month Family Credit figure remains
unchanged. Does the distortion arise in the second situation or
in both?
(Mr Knox) Maybe the Department should be dealing
with this specific question.
86. Since we have you here——
(Mr Knox) They devised an N code to run it, and
they ran a series of model examples on it and every one of them
did create a distortion after a period of time. For whole fairly
complex reasons we spent quite a few hours discussing this because
this was our hoped-for way of dealing with the situation, and
at the end even those of us who are totally committed to its being
through the PAYE system had to be realistic and accept that there
were distortions. There are dozens of reasons why it would distort,
and fascinatingly, you do need the paper to understand it. Certainly,
Chairman, if you decide to ask for the paper, I am sure the Revenue
will supply it to you. It might be interesting to hear your reactions
once you have read the paper. I said either the Revenue were extremely
clever and had taken all the possible examples which would show
a distortion, or it was just totally impractical to do, and I
could not see why they should take so many examples that would
show a distortion just to prove a point. When we had that paper
we could probably go away and disprove it if that were possible,
but so far our tax people have not disproved it.
87. That is very helpful and I shall not
try and pursue it without seeing the paper, but thank you for
telling us about it. If I could come back to the IoD memorandum,
where you said it is not in principle the job of employers to
administer the benefit system, employers already administer, and
have done for some time, statutory sick pay and statutory maternity
pay. So this principle has not been accepted by Government for
some years, has it?
(Mr Baron) It is true that the Government have
been loading these things on to employers for some years. It does
not follow that employers are happy about it. I think because
statutory sick pay and statutory maternity pay have now been around
for some years, it has just come to be accepted as part of life,
in addition, of course, to the considerable administrative burden
of simply running a PAYE system. We do not accept that that burden
should be increased.
(Mr Knox) On that point, we argued very strongly
against both systems becoming employer-based, SSP and SMP, with
the previous Government. In fact, we won many arguments behind
the scenes with them. They admitted that many of our arguments
were correct but it was the Government's principle of the day
to do this. That does not make this any more palatable, shall
we say, simply because we are already doing something else.
88. May I turn to a slightly different question,
which is the consequence of lifting the lower threshold for national
insurance contributions, and I think it is the IoD memorandum
which touches on the effects of loss of benefit entitlement for
the people within the bracket of £64 a week to £81 a
week. May I explore this business. If the Government wanted, first
of all, to retain national insurance benefits for people between
the present and the new lower earnings limit, and secondly, if
they wanted to extend benefits, such as maternity pay, to people
below the present threshold, what is the simplest way, from your
point of view, of doing that? The IoD memorandum, I think, refers
to simply supplying the Inland Revenue with a list of those employees.
How easy would that be to do given that there might be variable
hours and variable weekly pay involved for some of these people?
(Mr Baron) I think it would be pretty easy simply
to supply that list. The question would then be, what do you do
about someone who is on that list of between £64 and £81
a week or even less than £64 a week, for, say, half a dozen
weeks and then their pay goes up and they come into, if you like,
the "proper" NIC system or they are in the "proper"
NIC system because they are over £81 a week and then drop
below that threshold. I would certainly hope, if one were to go
down that route, that the Inland Revenue/Contributions Agency,
which, of course, is moving across to the Inland Revenue, would
sort that out and would track the people who appeared on the list
and also appeared in the proper NIC system, and would say, "That
is the same person twice." I would certainly expect the Government
to sort that one out.
(Mr Knox) It seems a bit ludicrous, when we are
discussing a minimum wage in this country and benefits, that we
have such a low threshold for both tax and national insurance.
I would have thought the sensible situation would be to raise
both of these with any money that is available. We have spent
a lot of money creating the New Deal, almost £3½ billion,
so we accept there is a fund of money there to help people into
employment, and the obvious way I would have tackled it would
have been to raise both these thresholds so that people in work
retained more of their money in the first place. It is ludicrous
that people who are reckoned to be in the poverty market pay tax
and national insurance. So that is the very basic principle. How
we then get round the fact that we take them out of other benefits
is a matter for the Revenue and the DSS to look at and see how
they can resolve that problem. But surely if we take people out
of paying tax and national insurance below £120—even
that I think is ludicrous—they should be able to earn as
much as, if not more than, that before they start to pay anything
on both.
89. Would you and your members be happy,
let us say if that were to happen or, indeed, the proposed raising
of the threshold, about supplying a list of employees who would
be below the threshold?
(Mr Knox) I am sure that both the tax authorities
and the social security could provide that list on a countrywide
basis a lot better than we could.
90. No, because the tax authorities and
the benefits authorities do not know whether somebody is employed
for 15 hours a week if they are earning below the threshold?
(Mr Knox) Yes, but you still have the part-time
employees. You still have various forms to fill out which go back
and should be collated by somebody. We still have to sign forms
that somebody is in part-time employment. If you took a proportion
of the Federation membership and IoD membership, you still only
have a snapshot of the situation, whereas surely to goodness the
Stats Office should have that anyway on a UK-wide basis.
Mr Pond
91. On that point, Mr Knox, I would certainly
agree that in recent years income tax and national insurance contributions
have become a contributory factor in pushing more people into
poverty. That is absolutely true. You then made a comparison between
the cost of the New Deal in creating employment and using those
funds, you suggested, to raise tax and national insurance thresholds
and exemption limits. Would that not be a remarkably inefficient
way of using a relatively small amount of money, certainly in
terms of employment growth, because, of course, raising the thresholds
means that most of the revenue that you are using in that way
is actually going to higher income groups and only a small proportion
of it is used to take people out of tax at the bottom, and then
to translate that into job creation. You are not surely suggesting
that would be more efficient than using that £3.5 billion
on the New Deal?
(Mr Knox) I must admit I do not altogether understand
your question because if you raise the threshold of tax and national
insurance you are saying that will make the better-off richer.
That would be within the tax structure to alter tax, if necessary,
the higher bands, if you wish. It should not affect people in
the lower band at all. They should benefit then; we should be
paying more, and it is a very basic situation that the Government——
92. Let me explain the point more clearly
then, that if you use that £3.5 billion to which you were
referring, as this separate pot that seems to be available to
raise tax thresholds, only a small proportion of that £3.5
billion would go in actually lifting people out of tax at the
bottom. Most of that would go in tax cuts right across the scale
and proportionately more to the higher income groups. So you are
saying you could claw some of that back by changing tax rates
at the top?
(Mr Knox) That is up to the Treasury to revise
the tax structure accordingly. They are quite good at doing it
at other times. I am not just suggesting that the £3½
billion that is being used on the New Deal is the only sum available
because, after all, if you take people out of benefit you are
saving the taxpayer money in the first place.
Chairman
93. I want to move on to Edward Leigh, who
has some questions to ask about the administrative burden, but
it is our impression, certainly interpreting some of the things
that Mr Martin Taylor has been saying recently, that there may
be more of this in the pipeline, that there may be more benefits
coming delivered via this route. Do you have any views about that
development?
(Mr Knox) Very strong views, I am afraid. I quite
like having a complex society where Government governs and employs
tax civil servants to deal with the tax structure and leave business
to go ahead and do what it is best at and that is providing employment,
making profits and being fairly taxed. I do not see why we should
extend what is there already and that is the fact that many of
us are—I was going to say unpaid tax collectors. We pay
to be tax collectors now more and more. We have just had a new
programme in for our wage pay roll and this is rolling on. We
are having more of these coming in. So it is actually costing
us quite a bit of money to do the Government's work. So the very
principle we have in this country of saving the civil service
or reducing the civil service and putting it on to employers will
have to come to a stop at some stage, partly because the system
will fall down, partly because employers will stop doing it, and
then we will have a very interesting situation when that comes.
Chairman
94. Richard, do you have a view on that?
(Mr Baron) I would certainly go along with what
Bill has just said. Do not do it, do not move more of the benefits
over to employer delivery, partly simply because of the burden
on employers, who ought, as Bill says, to be running their businesses
and creating new employment opportunities and jobs or profits
and so on, but also because of the more general principle, that
if you have a tax system and a benefits system and they are separate,
then you can go away and formulate benefits policy without worrying
too much about the interaction with the mechanics of the tax system.
(Obviously you worry about the interaction with the tax rates,
so that you do not have people receiving lots of benefits paying
it all straight back in tax.) Whereas if you start to make these
systems interact, then life immediately gets a lot more complicated.
When you have two separate systems they can go their own ways
and be designed to fulfil their own objectives. When you have
two systems which come together each has to keep an eye on the
objectives and the resources of the other, and just as a general
principle of life, you find life gets a lot more complicated and
there are far fewer policy options that are practical, and I think
that would be a shame.
Mr Leigh
95. I think you have made some very telling
points today and in the memorandum by the Federation of Small
Businesses in paragraph nine you say, and you have said this morning:
"However, employers are already the unpaid tax collectors
on behalf of the Government for NICs and PAYE ... Statutory Maternity
Pay and redundancy pay. Large businesses," you say, "have
extensive personnel departments to deal with such responsibilities—in
the small firm it is more often than not the owner manager performing
the calculations on the kitchen table." I think that is a
telling phrase. Do you want to tell us anything more about the
administrative burdens, particularly on small businesses?
(Mr Knox) A very basic principle: when they are
doing that they are not doing what they should be doing. The other
thing is that they are not really adept—and I can speak
from experience from talking to our members—at dealing with
Government work. They are pretty poor at it. They have never been
trained at it, whereas civil servants have, and we are more and
more in our Federation giving a back-up system. We have a 24-hour
phone-in system to cover a whole range of problems and that includes
Government work. It is becoming a bigger burden on them. They
are phoning up at all hours of the day and night wanting to know
how to do a whole variety of work, including Pay As You Earn and
national insurance. They still have problems, and if you look
at the pack that comes in—we do not use the pack but I opened
the pack six months ago to see how simple it was and after leafing
through it for five or ten minutes realised I was totally lost
because I could do it manually maybe ten or 15 years ago. I would
not know where to start manually now because it is becoming more
and more complex. I can just go and get a computer that does the
thing. So you have the ordinary man or woman out there who is
being encouraged to set up business who is not trained in any
way, is not helped by the state. They do not provide you with
programmes for your computer or anything to run the tax or national
insurance systems and you send these people out there, who are
pretty proficient at what they are good at doing, that is, running
their own business, but they have not honestly got a clue. If
this lands on them and for some reason their employee does not
get his benefits one week, I can see all the problems that are
going to fall on the employer's shoulders. At the moment, if anything
goes wrong with the tax structure, the employer gets it. They
do not phone up the Revenue. They come in and say, "You've
done something wrong with my tax," and it might be a code
change which they have been notified of and we have been notified
of and they do not realise it. It is always the employer who is
at fault. So this is another cause of potential disharmony, but
the more that the business people are dealing with Government
work, the less they are dealing with their own and that seems
a totally inefficient situation. I have always thought that the
British civil service was the best in the world, the most capable,
and should have continued to do its own job and its own work,
and it is one that I am sure the politicians and the taxpayers
felt that they could rely on, and the less they are dealing with
it and the more employers, on some occasions employees, are dealing
with it, the more there are options for fraud and distortion and
everything else that goes wrong.
96. Thank you very much. I very much hope
that our report will reflect that answer, but I put the alternative
point of view to the IoD that, although small businesses are the
overwhelming majority and what we have heard is very worrying,
presumably big businesses will have no problem with it because
they have large personnel departments, computers and the rest?
(Mr Baron) They may have less of a problem per
employee because obviously there is the initial set-up cost of
getting a system that will cope with this and then there is a
much smaller marginal cost as you add more employees. So it may
be less of a problem for them. It will, however, still be a problem
and they are still going to have to pay their software suppliers
or their pay roll bureaux to handle it and they will still be
getting complaints from employees saying, "Where's my money
this week? Why is it less than last week?" and all that kind
of thing. I think there is another problem, which is perhaps more
likely to affect big businesses, though it will be important for
a lot of small businesses as well, which is that big businesses
are slightly more likely to be paying salaries monthly rather
than weekly. People have traditionally expected to get their benefits
weekly and if somebody joins the benefit system on, let us say,
6 September, and the next pay day is 30 September, how does one
tide them over for those three weeks until the next pay day and
what happens at the end of their six-month benefit period? How
do you make sure that, having paid them whatever is due on 28
February, you then fill in the right amount to pay them for those
last days down to 5 March?
97. There is also the interesting question
about if they lost their job but I will not ask that, I will ask
somebody else to come in. Is it true from what you say in your
memorandum that employers might not employ somebody because of
this or sack them even, sack everybody who is an administrative
burden? Do you have any evidence of that from the small business
point of view?
(Mr Knox) There is a problem if it is not done
through the PAYE system and if it is going to be paid by the employer
on a weekly basis—and we had better cover the fact that
some are paid weekly, some are paid fortnightly or monthly, and
some are paid on other systems as well—if it is not paid
through PAYE, that employer can be out of pocket four or five
weeks before there is a possibility of reimbursement. If it is
not dealt with through the PAYE structure, at the end of the day,
and maybe it is £50 or £80 to the employee, and say
he has two or three employees, they arrive in the situation that
they can be paying £160 a week for five weeks and without
any income of any sort to cover that, so there is that possibility.
98. It is a cash flow problem for small
businesses? It is a cash flow problem as well as an administrative
burden?
(Mr Knox) A massive cash flow problem for some
of them.
99. That is assuming they are a small business
with a few employees?
(Mr Knox) If the benefit is going to go to a reasonable
level, having listened to the Chancellor's statement, it could
be people earning quite a reasonable amount of money will still
be receiving some type of benefit and if you are employing ten
people and only one is receiving benefit, then there will not
be a problem. If you employ two or three people and they are all
receiving benefit, you still would have a problem.
|
