Examination of witnesses (Questions 120
- 139)
TUESDAY 23 JUNE 1998
MR RICHARD
BARON and MR
BILL KNOX
120. You concede the point?
(Mr Baron) Yes. Obviously when you are facing
a potential employee you think, what can this employee do for
me, what are their skills, how dedicated are they going to be
to their work and all that kind of thing, and those are all absolutely
legitimate questions for an employer to consider when deciding
who to take on. It is arguably also a legitimate question to consider
what kind of hassle is this employee going to bring along with
him or her.
121. Is that not categorising people in
the same way as, why should I take on this mother who has children
if she maybe at some point is going to have to take time off if
the children are not very well? Is that not the same kind of thing?
(Mr Baron) Of course, we have laws about that
kind of discrimination and I think quite rightly, too. Maybe the
day will come when we feel the need for a law to stop discrimination
against benefit claimants or potential benefit claimants. I think
it would be a very sad day if we found ourselves forced down that
route because that will bring with it its own burdens.
(Mr Knox) I think again we are living in a slightly
unrealistic situation. I do not know how many of you are employers.
When you are interviewing—and last year I interviewed 20
people for two jobs—you categorise them in so many different
ways. It is not just one potential cost, it is ability and everything
else, but what we are doing by introducing the Working Families
Tax Credit is adding an extra negative to quite a few people who
are in that area of high unemployment at the moment and you cannot
legislate for somebody doing their own calculations and their
own figures and saying who the potentially best employee is for
that firm. You cannot honestly legislate against that. If they
do not openly discriminate and say, "I don't like your colour.
I don't like your religion," then you cannot legislate, and
it would be unfair to say to an employer that they cannot employ
the best person they think, the most suited person, for a job.
It would also be unfair in other respects, but whether the employer
mentally discriminates against a person at any time is always
something that you and I could never evaluate. The person might
unknowingly discriminate. They might say they have three kids.
122. You are not going to have a sign saying
"No WFTC clients need apply"?
(Mr Knox) No. Some employers might reverse that
and say people with families need the job more than a single person
with no family. The older people are and the more responsibilities
then the better employees they are. I can guarantee that.
123. Thank you very much for that. We are
told in your paper, Richard, that you "... welcome the Finance
Secretary's statement from Hansard (7 May 1998) that employers
will not be involved in collecting information or in competing
benefits." If that is the case, why is there a need to question
would-be employees on these matters?
(Mr Baron) There would not be any need to question
them. We are very glad the Financial Secretary made that statement.
If you are wondering who you should or should not take on then
you may not ask them the question directly but you will probably
gather information about their family circumstances and you will
know how much you are planning to pay them and you can have a
fair idea whether or not they are going to be claiming Working
Families Tax Credit.
124. Would you accept that once they are
employed employers will not need to collect the information because
that is going to be done?
(Mr Baron) Yes, we accept that. The Financial
Secretary said it in the House and that is good enough for us.
(Mr Knox) The last thing we want is to discriminate
against anybody in this world. It still is a problem and it still
will be a problem. If people are in employment and they claim
and receive Working Families Tax Credit I do not see any employer
deliberately turning round and dismissing them. Eventually the
system will adjust just as it has adjusted to deal with the present
Pay As You Earn system. It is another thing to be taken into consideration
and in time it will be taken into consideration. We employ one
lady who has two kids. The last thing she would want is for me
to know anything about her personal circumstances and I would
not want to know anything about her personal circumstances. I
am just happy to know that she works well and she is a good person.
125. But you accept that because of this
statement there will actually be no need for you to know those
circumstances?
(Mr Knox) Thank goodness. We pushed them for that
too.
126. Do you accept that?
(Mr Knox) Very much so. We should never know.
We are going into the lands of privacy that we should not really
be dealing with. That does not mean to say there are not going
to be burdens and various other things. There still will be a
workload and a variety of other aspects.
127. One last thing, I hope you enjoy your
eight o'clock meeting!
(Mr Knox) I think this Committee is slightly biased!
Chairman: Can we turn
now to the more complicated world of multiple jobs and part-time
work because Paul Goggins has got some important questions.
Mr Goggins
128. I wondered, first of all, whether either
of you might like to add to Richard's previous comments about
the 26-week commitment because the Chancellor has made it clear
that that commitment will remain in the Working Families Tax Credit.
Richard, you mentioned the potential for additional administrative
costs if a worker moves on somewhere else. I wondered whether
either of you foresaw any other practical implementation issues
in relation to that commitment to 26 weeks.
(Mr Baron) I think there is the question of what
you do when someone has got maybe a number of jobs. They might
have three different part-time jobs and then they might have two
and then they might have four and then they might have one all
within that 26-week period. It will not be a problem for the Revenue
in terms of working out the benefit, but there may be a problem
in splitting that benefit between the different employers. I suppose
the obvious way to do it would be to pick on one employer, whichever
one is paying the greatest amount and say, "Right, you are
going to deliver the Working Families Tax Credit to this person."
If that is the employment that ceases the others will carry on.
You have got to transfer it to one of the others.
(Mr Knox) There is a practical way round it and
there is a practical way round the stigma element too. If within
the Bill there is an option for anybody who has received the Working
Families Tax Credit to receive the money direct and not through
the employer then it means that people who are constantly changing
jobs will still be paid, although it will come from the Revenue
rather than Social Security. Also, it would take away any responsibility
for somebody thinking they cannot get employment. They can say
"Please pay me direct". If the Government's intention,
first of all, is to say to people there is a stigma with social
security, therefore if you take it as a Working Families Tax Credit
there is no stigma" and if some people say, "No, I would
rather retain the giro system" then I think we should give
them that option. If it enables these people to retain their work
or if it means they are constantly changing jobs that would be
an administrative nightmare to keep on trying to follow. We would
have to have some type of portable social security system to follow
them which would make it even more complex. We are apparently
going to allow a couple the option of deciding whether, say, the
unemployed mother receives the benefit or whether her working
partner receives the benefit. So why not give everybody the option
of receiving the benefit? If their main worry is the stigma and
they made the choice to receive the benefit direct then they are
acknowledging there is no stigma.
129. You are quite right, of course, that
this Committee recommended that the non-working spouse should
be able to continue to make the claim and receive the claim. In
practice, if somebody has two or three part-time jobs, do you
see all of those employers paying a bit of the credit or do you
see one employer paying a bit of the credit and, if so, how will
you decide amongst yourselves which one is the one that is going
to pay?
(Mr Baron) I think it has got to be one employer.
How do you decide? There is probably going to be some arbitrary
rule like whoever is paying the most at the beginning of the 26-week
period. The wages from the different employers might fluctuate.
That would be pretty arbitrary but it would be slightly better
than doing it by alphabetical order of employer.
130. Do you think there will be a system
for deciding that or will that just be an ad hoc arrangement
in each case?
(Mr Knox) It cannot be ad hoc, there will
have to be a system. I would imagine that if somebody has got
one job and they are receiving what is called "benefit"
at the moment through that one job and they then get further part-time
employment it stays with that first job. The complexity is at
the beginning of the 26 weeks, if they are in four jobs, who decides?
We are not capable of answering that question. I am sure the Revenue
may have an answer to it.
Chairman
131. Richard, I think it was your memorandum
that really raised some quite worrying degrees of concern about
potential abuse with the new child care tax credit. I wonder if
you could say a bit about that. I am particularly interested in
the potential for even collusion between employees and employers
as well as the more obvious informal/formal relationships within
families. Could you say a word about that for us, please?
(Mr Baron) Certainly it is a serious concern.
Most people are honest; some are not. If you set up a system that
can be milked you can be sure someone will milk it. The point
is that you are going to be able to get 70 per cent of the child
care costs reimbursed by the state. It is obviously very sensible
to limit the reimbursement to less than 100 per cent as otherwise
everybody would indulge in perhaps unnecessary child care facilities
simply because it was all being paid for. By leaving 30 per cent
still to be paid by the employee the intention is obviously to
deter that, to say, "Some of the burden is still falling
on you, therefore think before you start buying child care."
The problem with the system as we see it is that you can arrange
for somebody to care for your child. They will charge £100
a week. £70 will come back from the state to the mother.
£100 will go from the mother to the child carer. The child
carer will obviously have to declare that and pay tax and national
insurance on their income as a child carer, leaving them with
perhaps £60, something like that. Of that £60, £30
goes back to the mother so she is not out-of-pocket, ie, she has
paid over £100 and got £70 back from the state. £30
is left in the pocket of the child carer. This can happen either
as a deliberate attempt to defraud the system, which I suspect
is something only a minority of people will indulge in but enough
to generate a sizable cost, or simply because they will perceive
the logic of it and say, "Why don't I get my child cared
for like this? It is not costing much." I am very concerned
that the whole system is going to turn out to be a lot more expensive
than the Treasury are anticipating.
132. Is there an obvious way that you can
see of trying to build in some preventative measures into that
system?
(Mr Knox) It would have to be policed. It is only
a very small instance of this. It cannot be policed in a small
way, it has to be a UK-wide situation. There will be an administrative
cost there. I do not know how they tie it in with the other tax
matters they are dealing with at the moment because the number
of people who used to make revenue visits has now diminished greatly.
There just are not the people out there in the field even to do
the work at the moment never mind added work. At the moment the
black-market exists because employers, householders, you name
them, willingly want to pay, they think, less to buy a product
or to have something done. If that happens in a fairly open society
where there is tax involved and, as Richard said, in finance from
the state then there is that potential for it to happen there
as well and it will happen.
(Mr Baron) On the control issue, I referred in
my memorandum to the kind of anti-avoidance rules that you get
in the tax system about saying this has got to be an arm's length
transaction. The kind of thing you would expect is a straightforward
contract with no connection between the mother and child carer.
That sort of thing does work quite well within tax law because
it tends to get applied to sophisticated people engaged in very
sophisticated transactions with large amounts of money involved
and it is worth the Revenue's while policing that quite carefully
because when they catch someone out there is quite a big return
to the Exchequer from doing so. It is less clear to me that it
will work so well with this kind of child care transaction where
most of the people involved are going to be financially unsophisticated
and the amounts involved in any one transaction are going to be
very small. We would be talking about, as Bill says, quite a lot
of policing.
133. Is this the kind of issue that you
would be alluding to in the work of the working party that you
have got within the Revenue or is it something outside its remit?
(Mr Baron) I would say it is on the borders of
its remit really because it is not directly an issue for employers,
it is an issue for all of us as taxpayers because if this child
care tax credit turns out to be very expensive we are all going
to have to pay for it, but it is not specifically an employer
issue.
Chairman: I want to
ask Chris if he will ask some questions about the National Insurance
Contribution effects, but I omitted to call him when we were talking
about cash flows.
Mr Pond
134. We want to make sure that Bill makes
his eight o'clock meeting or at least the highlights! I am still
worried about this cash-flow issue because you have described
it as massive, Bill. That is going to cause panic in the Treasury.
There is an image conjured up of small firms having to sell their
kitchen tables in order to meet the costs of this. We heard much
of this when SMP and SSP were introduced. I do not think it came
to very much at the end of the day. Let me put two questions to
you about cash flows first of all. Is not this technically and
practically a problem which occurs in the first month or week
or pay period but not thereafter given that obviously you have
a lag before the first payment but then that first payment pays
for the second month and the second payment pays for the third
month and so on and so forth? Secondly, is there not access to
credit amongst these organisations? It is a guaranteed payment
from the Government to meet a very short-term gap in the cash
flow. Do you wish to revise the term "massive" in terms
of the effect this might have on firms?
(Mr Knox) Statutory sick pay still has its effect
and its effect is still the fairly high unemployment levels we
have in different parts of the country. That is step one. Step
two, yes of course it causes cash-flow problems. What I am saying
to you is that in the business community out there at the moment
some elements of it are doing quite nicely and others are not,
they are struggling. At the moment they have massive overdrafts.
Many of them are up to the limit on their overdraft. You cannot
go into the City and say, "I am going to have to pay Working
Families Tax Credit, please give me £70 pounds a week",
so what you do is you go to the bank and the bank is already holding
your collateral. You maybe get an overdraft and you are bumping
up against the maximum every week or month whenever you pay your
bills and you say, "I have got to do an extra"—if
you are employing two people—"£1,000 in the first
month". I see your point that you get it back at the end
of that, but you still paid out the first £1,000. If you
take on more people it can go up.
135. Does this not suggest that the finance
sector is not working terribly well? This is a guaranteed payment
from the Government. It is not something that banks would need
collateral against, it is absolutely rock-solid guaranteed.
(Mr Knox) There is no such thing in life unfortunately.
A lot of businesses do not go to the City for their finance, they
are dealing with the local banks and they are keeping the banks
in good profits with all the charges on the overdrafts they pay.
They are going to have to pay more interest for a higher overdraft,
that is what you are saying to me. What they have done is maybe
add on £1,000 to their overdraft. We are dealing in a one-person
situation here. The Government is transferring a massive payment
situation, if you look at it this way because they pay up front
per week. They will not do in future. They will go into a five
week gap and they do not pay anything to the many thousands of
employees and we are talking of billion of pounds. We are not
talking about £50 or £100. What you are doing is you
are taking a lot of money out of private industry and you are
paying them five weeks afterwards, whereas at the moment you are
paying up front to the claimant on a weekly basis.
136. You are talking billions for five weeks?
(Mr Knox) Do your sums.
137. Could I move on quickly to put one
or two points to Richard on your submission which is very helpful.
I want to talk a little bit about the work incentives element
and marginal tax rates. In your memorandum you reproduce a table
from the Budget documentation on marginal rates of tax and the
commentary on that in the document is saying that effectively
a reduction in marginal rates is not going to be terribly significant.
If you look at that table, it does look as though there is a reduction
in those paid the 70 per cent plus rate and there is an increase
in those paying the 60 per cent plus rate. However, the reason
for that is half a million of those that were previously paying
70 per cent plus are now paying between 60 and 70 per cent and
a quarter of a million who were paying 60 per cent plus are now
paying less than that. I would have thought that in itself was
a worthwhile change in terms of trying to deal with your disincentive
problems and the poverty trap. Is it not also the case that, in
terms of your commentary, you are not taking account of the interaction
of the Housing Benefit and Council Tax benefit system? You talked
about the 400,000 families who will have their effective marginal
tax rate increased from 33 per cent (basic rate tax plus national
insurance) to 69.85 per cent. These are new people being brought
in because of WFTC who were not in Family Credit. If you took
account of the offsetting effects of those other benefits and
council tax and housing benefit that would not necessarily be
the case, would it?
(Mr Baron) You are right to say that I have not
taken into account the rest of the benefit system. I do not know
off the top of my head what the figures would look like if one
did take all of that into account. I think it is still worth making
the point that a lot of these people who are in the 60 per cent
plus band are going to be pretty close to 70, at 68.5 or 69.85.
It is true that a lot of these people coming into the 60 per cent
plus band are simply new people who were totally outside the system
beforehand. I am afraid one of the sad facts of mathematics is
that if you reduce the taper rate then you suck more people into
the system and you subject more people to that taper. I do not
believe that there is any way round that other than simply giving
everybody a benefit, a so-called citizen's income where everybody
gets paid £5,000 a year or something like that, which is
fine except it leads to a basic rate of income tax of about 60
or 70 per cent.
138. The other elements that are not taken
into account—and this is not a criticism of your paper,
it is not focusing on that issue—are the 10p tax rate which
the Chancellor has confirmed is on its way when circumstances
permit and also, of course, the national minimum wage which is
on its way rather more speedily. Both of those will have an effect
in reducing the numbers subject to these higher rates. Can I have
a reaction from both of you in terms of both of those policies?
Are they policies that you welcome?
(Mr Baron) Let us take the national minimum wage
first. No, we are against it.
139. Why is that?
(Mr Baron) Because it is interfering with market
determined wages and at the margin it will lead to some people
not getting jobs that they otherwise would have got.
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