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Mr. Deputy Speaker: With this, it will be convenient to discuss the following amendments: No. 1, in page 3, line 37, after 'employers', insert
- 'who employ at least 21 workers'.
- 'shall be construed in accordance with section 6 above but excluding employers with fewer than ten employees'.
Businesses in this country have accumulated a huge regulatory burden. Although any regulation on its own tends to add just a small burden--20 minutes a week, an hour, a month, or a few minutes here and there--when it is added to the hundreds of regulations already on the statute book, it soon becomes clear that regulation is stifling business and strangling small businesses.
The administrative burdens that the Bill imposes on business, and the raft of regulations that are spawned by it, are an unwelcome exception to that principle because the regulations, by themselves, impose a significant burden on business. The regulatory impact assessment estimates that £103 million a year of recurrent administrative costs will be imposed on business. That is in addition to £43 million in one-off set-up costs arising from the Bill.
It is clear from the draft regulations on tax credits payment by employers how burdensome the rules are. First, employers must calculate the amount of working families tax credit or disabled persons tax credit to be paid by multiplying the daily rate, which is notified to them by the Inland Revenue, by the number of days in the period. That must then be added to the employee's net pay, after deducting PAYE and national insurance contributions. Next, the employer must enter that figure on the employee's pay slip and record it separately as an item entitled "tax credit". That must then be totalled, and a separate tax credit figure recorded on yet another form. Total tax credits paid to each employee must be entered on Inland Revenue forms P14 and P60. At the end of the tax year, another form--a P35--must be filled for all employees, including the total amount of any Inland Revenue funding for the year. Finally, the employer must produce certificates of payments for leavers.
All that places a huge extra burden on small businesses. Most of the work is carried out by the boss at the kitchen table, using up time and energy--[Hon. Members: "On-message."] Absolutely on-message: kitchen-table conservatism. That uses up time and energy which should have been devoted to running and developing the business.
The amendment specifically excludes employers with fewer than 10 employees. The regulatory impact assessment says that there are 835,000 such businesses in Britain out of about 1.2 million. However, they employ only about 100,000 individuals, out of a total of 730,000 people who will eligible for working families tax credit which will be paid through the payroll. Therefore, the amendment would take out of the system just 14 per cent. of the total number of people who are eligible for working families tax credit.
The regulatory impact assessment says that employers of fewer than 10 employees will incur costs of £35 million a year, out of total costs of £103 million. That is equivalent to some 35 per cent., so exempting all businesses with fewer than 10 employees would lift a huge administrative burden from 60 per cent. of employers. Such an exemption would save 35 per cent. of the estimated costs by removing all relevant costs from the employers, yet it would mean just 14 per cent. of employees who were likely to receive working families tax credit through the payroll, would not do so.
Despite the exemption, the Government would still be able to pursue their policy--however misguided--to pay through the payroll the majority of the recipients of the working families tax credit--86 per cent. would still be eligible under our amendment--but a huge burden would be lifted from 835,000 employers, who represent some 60 per cent of all employers.
Mr. Robert Syms (Poole):
In my experience, many small businesses, particularly those trying to get started, are husband-and-wife teams. In many instances, one or other partner works for nothing to get the business going. Will not all those regulations add another burden to that business?
Mr. Gibb:
My hon. Friend makes a valid point. Many Ministers do not realise that running a new business is a dangerous, difficult and risky operation. The difference between success and failure is very fine. One extra
The Government seek to change the behaviour of employees and potential employees, not employers. Therefore, the fact that the amendment takes 60 per cent. of employers out of the ambit of the Bill should be a good thing, and should not be a reason for Government opposition to the amendment.
The amendment has the support to the Confederation of British Industry, which has said in a briefing that was prepared specifically for the debate:
Similar concerns have been raised by Taxaid, a charity which helps individuals who cannot afford an accountant to guide them through the minefield that has become our tax legislation. It is concerned that the
I draw to the House's attention the deceptive way in which part of the draft regulatory impact assessment has been worded. I am grateful to Roger Cockfield, a reader in taxation at De Montfort university, for drawing that to the attention of hon. Members.
Paragraph 56 of that assessment refers to the fact that the administrative cost to employers with fewer than five employees will be £24 million. A total of 70,000 employers of that size of work force are likely to administer working families tax credit and about 70,000 employees will receive the benefit. That would work out at an average administrative cost of about £342 per year per employer. Paragraph 56, however, has averaged the
£24 million over all 670,000 employers with fewer than five employees, giving an administrative cost of just £35 per employer per year.
That is just not on. Government-funded documents must not be used deliberately to mislead. I urge Ministers to amend the draft regulatory impact assessment before it is finalised. If the Government are confident that their policy on working families tax credit is right, they should not need to manipulate the evidence.
The amendment will save some 835,000 small businesses from a huge and intolerable administrative burden. It will not have an impact on the thrust of the Government's policy plans because 86 per cent. of those employees who the Government estimate will be paid working families tax credit through the payroll will continue to be so paid. Therefore, I urge the House to support the amendment.
Mr. Webb:
Amendment No. 1 would exempt firms that employ fewer than 20 people from the requirement to pay the tax credit. Many of the arguments that have been eloquently expressed in favour of amendments Nos. 8 and 5, which would limit the measure to firms employing 10 or more, apply to firms with 20 or more employees. The hon. Member for Bognor Regis and Littlehampton (Mr. Gibb) made a convincing case for the modesty of his proposal. The Government could still force payroll payment on most of the employers at whom the measure is directed, with minimal impact on small firms, so I have much sympathy with his point.
How might one seek to alleviate the burdens on small businesses? There are alternative models to those proposed in the amendments. One is the statutory maternity pay route, where employers are asked to deliver cash from the state to the employee. In return, small firms are given reimbursement and a contribution towards costs.
One would have welcomed the Government's saying that the working families tax credit was exactly analogous to statutory maternity pay. The measure is a request by the state for employers to deliver cash to their employees. Therefore, employers should be compensated for doing so. We would have welcomed such a measure, but regrettably the Government have not gone down that route. I would be interested to hear from the Minister why they have rejected that approach. Because they have rejected it, we have had to look at exempting small firms.
As the hon. Member for Bognor Regis and Littlehampton has pointed out, the total administrative burden of delivering the tax credit will be £100 million. That is a £100 million bet on a hunch. The Government have a hunch that payment through the pay packet will be more effective than payment direct to recipients, but it is not just a Government bet of £100 million; it is a Government bet of £100 million of other people's money. It might almost be described as a £100 million bet on a non-runner. The Government are saying that businesses will have to find the money to back the Government's hypothesis--their social experiment, of whose success, depressingly, we have seen no evidence. Indeed, the hallmark of our debates on the Bill has been the lack of evidence to support the Government's case.
Inevitably, small firms--the subject of the amendment--will be hardest hit. Larger firms may be able to absorb the costs, but, as the regulatory impact assessment points out, firms that employ one or two
people and have manual payroll systems will suffer. The Inland Revenue itself says that smaller firms are more likely to pay low wages, and are therefore disproportionately likely to be affected.
Things could get worse for small firms. If they do not pay much employer or employee national insurance or income tax in the first place, they could end up having to give their employees more in the form of working families tax credit than they take from them in tax and pay to the Government. They could be out of pocket. Moreover, it seems to me that the Chancellor's announcement in the Budget last Tuesday of a child tax credit will make matters even worse: presumably employers will have to deliver that as well, and will therefore be even more out of pocket.
Either small firms will have to sub the Government if they do not spot this coming, or they will have to plan a month early, work out that they will have to pay their employees more than they have to pay the Government and apply for a sub from the Government--which, of course, will mean extra bureaucracy. Whatever happens, they will lose the benefit that they currently gain from the PAYE income tax and national insurance that sits in their bank accounts until they have to hand it over. If they have to hand it over at the point in the month when they pay employees' salaries, they will lose interest. All that is part of the £100 million cost to which the Inland Revenue has admitted.
"Payment of WFTC via the wage packet will entail additional costs for all employers but particularly for small firms who are particularly adversely affected by compliance costs. The CBI therefore supports those amendments that propose an exemption for very small firms from administering the credit."
Mr. Brian Prime of the Federation of Small Businesses has said that the working families tax credit
"would mean another administrative burden placed upon small business owners, who are already the unpaid tax collectors on behalf of Government for income tax, NICs and VAT, and who also fund such benefits as Statutory Sick Pay, Maternity Pay and redundancy pay."
That is why the federation opposes the whole Bill.
7.45 pm
"implementation of an untested and unfamiliar scheme will impose considerable stresses on employers and we have serious concerns about the ability and willingness of smaller firms to deliver the new tax credits, because of the additional compliance burdens that will be imposed upon them."
The Institute of Taxation has said:
"We are concerned that overall the extra burden on employers may end up as disproportionate to the benefits gained."
Conservative Members fear how small businesses will cope with a regulation that is particularly difficult and cumbersome, and so important to their employees. As my hon. Friend the Member for Bromsgrove (Miss Kirkbride) said in Committee, most small businesses, like the small jeweller's shop in Bromsgrove, are simply unaware of the impending additional burden. When it hits them, they will be angry and for many small businesses, it will simply be the final straw.
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