Examination of witnesses (Questions 100
- 119)
TUESDAY 23 JUNE 1998
MR RICHARD
BARON and MR
BILL KNOX
100. Do you have a perspective from the
larger businesses in terms of cash flow or actually employing
or not employing somebody?
(Mr Baron) On the cash flow point, there will
certainly be a cash flow downside for businesses of all sizes.
If you are a very large business with employees spread throughout
the wage scale and say you have 10,000 employees, you should be
able to predict a constant situation. Let us say 400 of them are
going to be in receipt of Working Families Tax Credit, so you
have a bit less of a problem than the small businesses because
it is always going to be about that kind of level, say 4 or 5
per cent. of the workforce, whereas with small businesses, if
you take one new person on, suddenly 25 per cent. of your workforce
is in receipt of benefit. The percentage of the workforce will
fluctuate much more for small businesses. On the point about taking
people on and sacking them, I would be very surprised if employers
were sacking people because they received the Working Families
Tax Credit. I think if the employees appeal to a tribunal the
employees would probably come off best. Certainly I would not
endorse employers sacking people. I would not endorse employers
discriminating between people when they take them on for that
reason. I can see it happening, but, of course, that will be totally
counter-productive and against what the Government is trying to
achieve.
Mr Wicks
101. May I ask you a slightly different
point. I do understand the administrative concerns of employers
and this Committee would want to take this seriously, but at the
most fundamental level, in terms of what this policy is about,
is it not rather extraordinary how ungenerous you are being about
what the Government is doing because once upon a time—let
me put it to you to see how you react—we lived in an economy
where we at least pretended that an employer paid a wage which
would be sufficient for that individual and his family—I
am thinking of the family—and the state had nothing to do
with it. We now live in a society where society thinks that a
family with children needs X pounds per week and increasingly
employers are not able to pay sufficient wages to match that level.
So along comes the state generously saying , "In future for
many of your employees we do not expect you, the bosses, to pay
a full wage. You will pay a wage and the state will pay another
wage and all we are asking you to do is administer it." So
you are getting the worker for only part of the wage. Why are
you being so churlish about this?
(Mr Baron) No, sorry, this person's work is worth
only X pounds a week. If they want more I am unable to employ
them.
102. Or you might put up the wage if you
want to keep them?
(Mr Baron) You might if you want to keep them,
if that makes economic sense. I think you said at the beginning,
there came a stage in past history when society decided that somebody
in certain circumstances, with so many children or whatever, ought
to have X pounds per week. Fine. Can society sort that one out,
please? Can society deliver that money? There is no suggestion,
I am glad to say, that employers should start actually shelling
out money in benefit. The money still has to come in.
103. What about the incentives issue? Here
you are getting someone and when they see their net pay it is
far higher than you as an employer could afford and yet you are
getting that person's labour, so in terms of incentives I do not
see why you are not more embracing of this issue?
(Mr Baron) That is assuming that switching the
payment of the benefit from getting the Giro that you cash to
putting it through the pay slip will be having that effect and
will be making people that much happier to work for you.
104. That is the essential reason for the
change, is it not?
(Mr Baron) I must question, though, whether there
is evidence that that will genuinely happen. As I think I said
at the beginning, it is extremely difficult to gather hard scientific
evidence on that kind of thing, because we are dealing with human
motivation, how people behave when all sorts of things other than
their money may be changing at the same time. So it is very hard
to answer that question, but I would seriously question whether
there is evidence that that benefit is going to be delivered.
105. What does Mr Knox feel about this?
(Mr Knox) I just wish life were as simple as that.
I just wish we were not paying tax and a whole load of other things.
The world is pretty well distorted and the benefit system has
helped to cause that distortion to an extent, and yes, there are
some jobs where people are under-paid, I accept that, and I always
will accept that. The vast majority of jobs are paid the going
rate and a lot of businesses cannot earn any more from that individual
for a whole variety of economic reasons. This country has had
a long period of slump. I would argue that it is suffering from
many years of slump. If I as an employer could double my wages
and double my charges I could do so tomorrow quite happily. The
net result would be I would have no work. I would have to pay
off my employees. Okay, I might then be on benefit, so it is not
as simplistic as that, unfortunately. If you are saying that if
somebody decides to marry and have ten children the employer should
pay an awful lot more to that person than to a person with one
or no children, that is also what you are saying there, because
if you are saying the employer should pick up the social security
tab, then that would be the inference you would have to come at.
106. I think what I am saying is that under
the new system someone's net pay might be, say—let us make
up some figures—£200 a week rather than £150 a
week and I would have thought in terms of incentives, that person
feeling happy about his or her labour, you would embrace this
policy?
(Mr Knox) Go back a bit further. You say the state.
The state does not pay anything. The taxpayers pay it, so all
we are doing is taking tax off the taxpayers, you and me—presumably
we are all paying tax here—employers and employees in the
first place. So we are taking it off and we then have a roundabout
system of repaying it and there is a variety of ways and one is
the benefit system. To come back to the attitude I said initially,
there are two points I made. One is that we actually welcome the
whole suggestion of taking unemployed people into employment and
we also welcome the fact that they should earn a reasonable sum
of money. That is accepted, but if you wish to do it properly
then you have to reduce the burdens that are on the people who
are in employment in the first place, who are in that broad level,
so that they retain more of their money. Why say to the employer,
"You pay more so we can take more tax and national insurance
off that person." We are fighting an unequal battle here
between the state and the employee, I think, so it is more complex.
A very simplistic comment: reduce the tax and you will find more
people in employment. Does that help complicate it?
Chairman: I think
Julie has some supplementaries.
Miss Kirkbride
107. First of all, I find your views interesting.
You basically say that the case for making it more attractive
to go out to work is unproven and it is going to make employers
have significant extra burdens in a way that I do not think this
Committee had appreciated, particularly this PAYE argument, because
we were given very clear evidence last week that it would be delivered
through the PAYE and it was all going to be perfectly straightforward
and a Y was going to be changed here and a 2 was going to be changed
there to pay for the thing and the whole thing would just go through
and no-one would notice any difference. I would be quite keen
for you to take us through it. What will this mean for employers?
Will they all have to buy new software or go out on to the high
street to buy new computer systems to cope with the N factor or
whatever it was? What is this really going to mean to employers?
(Mr Knox) Could I cover a point Richard touched
on. Discrimination in employment is always a bad thing. Nobody
accepts that that is ever good, but if I am employing a person
in my office and one comes in who is maybe a woman aged 40, no
family now, grown up, quite obviously not in receipt of benefit,
and I have another, 20, with three children, in receipt of benefit,
and I will have to fund that benefit for five weeks, you are loading
the dice very, very heavily against that 20-year-old. So whether
it is discrimination or whether it is commonsense, whatever you
are talking about, you are creating a situation with the very
people who are desperate to get back into work and should be back
in work, who are going to very difficult to get back. That is
the first principle of getting them back. The Pay As You Earn
system seemed brilliant, a negative tax payment every week. It
seemed obvious and we spoke to the Treasury and to the Inland
Revenue before the last Budget and they said it probably could
work and I am sure that Taylor still thinks it could work, but
he wants to speak to the Committee that we are on and I will give
you its title. It is the Working Group on Working Families Tax
Credit, if that is any good to you.
Chairman
108. The secret is now out.
(Mr Knox) Correct. And we went down the road of
saying that from an administrative point of view it would mean
the Revenue does all the work, simply sends us a notice saying,
"There's your new N code," or whatever and we deal with
it through the normal process. It is not apparently going to be
able to work that way. We are actually going to add to the wage
slip every week a separate item. We do not know whether it is
going to come in at the moment before gross wages, before net
wages, after net wages. There is a complexity there, and the people
who deal with the pay roll industry are looking at it to see how
it can work. It will add to the cost because all the companies
that at the moment are providing computerised pay roll systems
may have to start from scratch and go through the whole thing
again, depending how it works out. So it will actually cost money,
no matter, and the poor person at the kitchen table—I think
it is a brilliant idea of doing it at the kitchen table, a lot
of people do—is going to sit with another additional part
of the structure, but more and more of them are just going to
walk away from it. We have to be careful. There is already a large
black market out there and there are people trapped in that market
and this could add to it. That is another big worry. I am a force
in the building industry and I compete against people in the black
market on a daily basis and that will be another way it will increase.
109. How often do you expect to be informed
about what the Tax Credit is, this week, this month, every two
months, every six months, and who is going to tell you? Are they
going to ring you up or are they going to send you a note? How
is it going to work?
(Mr Baron) Our understanding is that the system,
the basic policy of what is now Family Credit, is, so far as I
am aware, not going to change, so it will still be a benefit for
26 weeks, so it will be notified at the beginning of that 26-week
period—payment to Fred, an extra £50 a week or whatever
it is—and that remains fixed, and that, as we have already
said, is likely to go in as a separate line on the pay slip after
you have computed tax and national insurance, because putting
it through the coding system just does not look as though it is
going to work. So the administrative burden is going to come when
someone goes on to that benefit. You have to enter into your system
that Fred now gets an extra £50 a week, you have to make
sure that lines up correctly with your pay periods, so you may
be being paid monthly and Fred goes on to benefit three weeks
before the next pay day or one week before the next pay day or
whatever. That could be a problem even for someone who is being
paid weekly because the policy at the moment is that your benefit
week starts on a Tuesday. I believe pensions are paid on a Thursday
or something like that so that you do not get huge queues at the
Post Office. Now most people on weekly pay get paid on a Friday,
so there might be good grounds for changing the policy of the
benefit just to shift that week, that start date. You have an
administrative burden when the 26-week period ends because it
is possible that the person receiving the benefit will carry on
at the same level of benefit, but they will certainly have to
reclaim, be re-assessed. Their benefit may go up, it may go down,
they may drop out of the benefit system depending on how their
circumstances have changed. So you have a burden there. The regular
payments, once you have actually got someone into the system,
should not be an enormous burden because each week or each month
you just pay them the same as you did last month. So in between
the start date and the end date there are a couple of extra places
where you get burdens. One is when an employee who is within the
benefit system leaves and you have to give the new employer, if
any, enough information on where they have got to in their 26-week
period so that the new employer can pick up the threads and, correspondingly,
when you take on someone who is already somewhere within their
26-week period of benefit, you have to pick up the threads and
say, "How long is it until the next pay day? Is it three
weeks, is it one week? Are they nearing the end of their period
of benefit entitlement?" and so on. So those are places where
you are going to get burdens, basically whenever anything changes,
which is going to be at least every six months.
110. I have one more question on the cash
flow. Presumably in almost all cases the tax that you are taking
off other employers will pay for the benefits for those who need
them, so it is unlikely ever to be a negative cash flow?
(Mr Baron) Yes.
(Mr Knox) If you run a whole series of models,
there will be some yes, some no, especially in smaller firms maybe
employing one or two people. You will have in very small firms
people in the very negative sense having to reclaim for a period.
What we have suggested as one way around it, I suggested they
send the 26 weeks' benefits in a cheque to the employer at the
beginning of that period. They did not seem to think that was
very practical. I said that would help the cash flow rather than
hinder it. The other way was to do it by a bank transfer every
month or so beforehand to try and ease the problem, so they are
going to look at that and see whether it is possible, but I still
think the 26-week period is ideal. There is the other problem
that tax is calculated on an annual basis, 52 weeks, social security,
26 weeks, and one of the distortions we found is if someone came
into the PAYE system with the new benefit and we go down that
road, and they join during week 51, it could knock the whole tax
year apart. There are so many ways. You could look at the PAYE
system, at how it would be distorted, so at the moment, unless
it can be dealt with very simplistically by ideally a payment,
what we would like to see is a payment received which the employer
passed on to the employee. One way of doing it would be to send
a book of vouchers to the employer, in the same way as it is done
at the moment, and I would tear it off and hand it to the employee
every week. The Government will not like that because it still
looks like a benefit system. Fine. Do something similar. Send
the employer the money, either that week or on a weekly basis,
and then that still gives them all the work in the first place
that they are trying to reduce in Preston. This partly is to reduce
the amount of the workload that the Revenue are dealing with or
the social security are dealing with. At the moment there is one
centre in Preston that deals with it all, and the idea is that
they will do the calculation but not the payment. They will send
us a letter or some document instructing us to pay X to a person
for a period. That has still not been worked out yet how it is
going to be devised. The unfortunate thing is that we did say
we felt the consultation on this was almost non-existent. This
should have been dealt with when the Chancellor was appointed.
They should have discussed it with all the people concerned, including
the trade unions, who have not been consulted at all, right at
the very beginning to see whether this was a practical situation.
The Government have got themselves on a hook. They have announced
in the Budget a system we are now finding almost impractical to
run the way the Government want it to run and we are landed with
that hook and at the end of the day we will come up with some
compromise that will work, hopefully.
111. Just one other question: have you costed
what you think the burden will be on employers?
(Mr Knox) We have now been at three meetings and
we are not much further ahead than we were at the first meeting.
Chairman
112. We have quite a lot of territory to
cover. Can we tighten up the process a bit. It would help us a
lot if you would not mind doing that. Having said that, may I
ask an additional question. Has the Working Party looked at how
employers would have to respond to a successful appeal against
an initial disallowal of Working Families Tax Credit in the same
way that an appeal process can take place in Family Credit? Could
you briefly deal with that? The answer may be yes or no. The answer
is no?
(Mr Baron) No.
Mr Roy
113. Could I ask a supplementary I thought
of about 25 minutes ago. You said that some of the companies would
experience a massive cash flow because of the WFTC and you then
said something else about five minutes ago, but on your first
remark, that they were going to have a massive cash flow problem,
what research have you done into the monetary value of that massive
cash flow?
(Mr Knox) First of all, we have been told by the
Revenue the average payments that we will probably meet. If you
are employing one person, for example, and only one person, there
is an awful lot of paperwork employing anybody, but a lot of people
employ one to five people. If you employ one person and they are
in credit and they are receiving £80 a week, then that is
£400 you are paying out before you get any type of reimbursement.
For a small firm, say a shop already struggling to pay its overheads,
that additional £400 is massive.
114. What about the money you save when
you are collecting people's tax? Do you not take it in with one
hand and give it out with the other and, therefore, that is not
a cash flow problem?
(Mr Knox) For years we have argued with the Revenue
about this and with the Chancellor that, in fact, that is still
part initially of the employer's employment costs which the employer
eventually passes on to the state at the end of the period of
time, and that still has to be financed and is still financed
by the employer. The state does not give the employer anything.
It is the other way round. The employer and employee are paying
tax to the state and it still has to come out of the total calculations
that the employer requires for finance in the first place.
115. Is there not a case when an employee
is paying £40 tax and you have to pay WFTC of £40, that
that is not actually a cash flow problem because what you are
doing is taking money and putting it elsewhere?
(Mr Knox) Technically it is still a cash flow
problem because at the end of it you are still paying out money
for a period of five weeks which you would not normally be paying
out. Everything that affects cash flow is still a problem in many
small businesses.
116. But it is not a massive cash flow problem,
is it?
(Mr Knox) Everything is relative. To somebody
earning £100,000 a week it is peanuts. To somebody running
a small firm—and a lot of small firms are very much on the
borderline—the profits are horrendous. The Revenue in fact
have figures that would support that argument, if you wish.
117. What percentage of your members do
you think this is going to affect, this massive cash flow?
(Mr Knox) Until we know more of the parameters
it is going to be difficult to say.
118. You do not have it?
(Mr Knox) No, because it is now becoming additionally
more complex with the minimum wage coming in and other factors
that happen, too. We are very much in a situation of flux. Any
figure I gave you off the top of my head would have to be a massive
guesstimate.
Chairman: Perhaps
we could have some questions asked about the impact on employees,
which are quite important to the Committee's work.
Mr Roy
119. From an employee's or would-be employee's
point of view, Richard, what would you say to your members who
you may think will discriminate, as you say, against employing
people who are on Working Families Tax Credit? What would you
say to them?
(Mr Baron) I think we would have to say that we
would not endorse such discrimination but we can see the point.
You would rather not take on someone who is going to give you
a lot of administrative hassle.
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