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Dawn Primarolo: I am coming to my second point which deals specifically with the hon. Gentleman's question, and with the removal of so many employers from their responsibilities within the tax system.

Amendments Nos. 1 and 3 would give employers the right to opt out of their tax obligations. That is a novel idea. If it were a feature of the tax system generally, I wonder how many employers would, for example, voluntarily operate the pay-as-you-earn scheme.

To remove employers in such large numbers from their tax obligations--70 per cent. of all employers--is clearly unacceptable. Tax credits are part of the tax system, and it is completely unacceptable to say that employers can elect not to fulfil their tax administration responsibilities.

By accepting the amendments, the House would give in the region of 825,000 employers--70 per cent. of all employers--the ability to elect not to carry out their duties in relation to tax credits. That is not acceptable.

Mr. Webb: The hon. Lady will know that the Government have said that the smallest firms, those that do not have a PAYE or national insurance liability at present, do not have to deliver the tax credits directly through the payroll, and that they can be paid directly to the recipient. Those small firms are not giving up on their duties--rather, the Government have recognised that they are a burden on them, so why is the argument different?

Dawn Primarolo: If the hon. Gentleman will be a little more patient, I shall address those points, which were a feature of our debates in this House and in the other place.

I was making the point about the number of employers who would be removed from the scheme. In his first intervention, the hon. Gentleman asked about the number of employees involved. The figure is in the region of 100,000, which is a substantial number to remove from the scheme. His second intervention was about employer burdens and what will happen to those employers who are not required to be in the PAYE scheme. If I may go on to the next section of my remarks, I shall be able to deal with that point.

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The main criticism of employer payment of the tax credit concerns the method of payment imposed and unacceptable burdens, although I note that today's Confederation of British Industry press release welcomes and

"supports the Working Families Tax Credit which should play a key role in raising incentives to work by targeting additional resources on those people who are most likely to suffer from the poverty and unemployment traps".

I am sure that we all have a copy of the press release, which points out that

"the CBI welcomes the government's recognition"

of the issues in respect of the cost of compliance and

"looks forward to working with the government to develop proposals to meet the needs of smaller firms."

I should say that I will deal with that point during my speech, in case any hon. Members think that I might miss it out.

Mr. Pickles rose--

Dawn Primarolo: I am always pleased to give way to the hon. Gentleman, but I should be grateful if, in return, he would answer my question: does his party support the working families tax credit--yes or no?

Mr. Pickles: I am sure that it was for the sake of brevity that the hon. Lady missed out the paragraph of the CBI press release that states:

"We would have preferred smaller firms to have been exempt from administering the credit".

Does she believe that Lord Haskins, who has been asked to look into this matter by the Prime Minister, is wrong when he says that the Government have underestimated the impact of the working families tax credit on small businesses?

Dawn Primarolo: Shall I take the hon. Gentleman's answer as yes--his party intends to repeal the working families tax credit, denying millions of children and families the support that it gives? He is quite right; I do not deny that the CBI would have preferred different action, but it is saying that, despite its concerns about employer compliance, it accepts that the Government recognise that something will need to be done in that area and that we will respond. It is not opposing the Bill; it welcomes the Bill. If employer compliance is such an overwhelming problem, one would have expected the CBI to feel unable to support the Bill.

Mr. John Bercow (Buckingham): Will the hon. Lady give way?

Dawn Primarolo: As always, I am happy to give way to the hon. Gentleman, but then I must try to make progress, if he will permit me.

Mr. Bercow: I am exceptionally grateful to the Paymaster General for giving way. On the subject of opponents of Government policy in this area, is she aware that the National Farmers Union is resolutely opposed to the current position because the great majority of agricultural businesses would be adversely affected? Given that she is flagging up her willingness to consider means by which to alleviate the burden on small

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businesses, is she prepared sympathetically to consider the NFU request that the new measure should be delayed for two years to allow agricultural businesses adequately to prepare themselves for it?

Dawn Primarolo: The Government are not prepared to delay the implementation of that policy because we are not prepared to stand by and watch as millions of children who could be assisted by the measure continue to be trapped in poverty. We have made it clear--and the CBI recognises this--that tackling compliance cost is being addressed; on that basis, it supports and welcomes the Bill.

The Government have recognised from the outset that employers will incur some extra costs in paying tax credits through the payroll, and we are doing everything possible to keep those extra costs to a minimum. Since May 1998, we have been consulting representatives of employers and payroll software suppliers on the details of the scheme, and significant changes have been made to meet their concerns.

We have also recognised that, whatever the advantages of employer payment of tax credits, that method of delivery may not be appropriate in all cases. As the hon. Member for Northavon (Mr. Webb) pointed out, some employers are so small that they are not required to comply with PAYE arrangements. We have already announced an exemption for certain very small employers, in whose case the advantages to employees of receiving their tax credit with pay would clearly be outweighed by the practical difficulties. A line must be drawn somewhere, and the Government have drawn it at that point, given that those employers will not be participating in the PAYE scheme.

Employers will normally offset tax credit payments against PAYE tax payments, national insurance contributions and student loan repayments that they are due to make to the Inland Revenue. If their liability to the Revenue is not enough to cover the tax credit payments that they are required to make, they will be able to apply to the Revenue in advance for funding. That was discussed extensively during earlier stages of the Bill's passage.

What are we to do about employers who do not operate a PAYE scheme, because they do not have to deduct tax or national insurance contributions from the pay of their employees? Employers in that category would include people who employ a cleaner or gardener for a few hours a week. They currently have no dealings with the Revenue in their role as employers. For those employers, the burden of paying tax credits with pay would be disproportionate, because they would be brought on to the Revenue's employer database simply through once having had tax credit recipients on their payroll. They would have to apply to the Revenue for funds on that basis, because they would not be able to make deductions from the payments that they were collecting on behalf of the Revenue.

In Committee, we announced that we had decided to exempt employers from paying tax credits through the payroll if they did not operate a PAYE scheme. That was an entirely reasonable move, and was welcomed as such. It is a targeted exemption, which will take about 80,000 employers out of the scheme. I am anticipating a possible further intervention from the hon. Member for

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Northavon. The exemption will be relatively easy to operate, because the Revenue's PAYE database will quickly confirm whether a particular employer qualifies for it. In the vast majority of cases, employers will not need to be troubled in the first place.

Let me now deal with the practical implications of Lords amendments Nos. 1 and 3, which, by contrast, would be anything but easy to operate. As I said earlier, they would be an administrative nightmare. The central practical problem is how the Revenue will know which employers qualify for the opt-out. Inland Revenue information about the number of people employed by a particular employer is based on employers' end-of-year returns, so it could be up to a year out of date. A possible source of information could be the employees themselves, but employees filling in their tax credit application forms will, in many cases, not know how many other employees work for the same employer. They may send in the form without the information, make a guess, which may or may not be correct, or ask the employer for the information--thus adding a further element of employer involvement and possible delay in the application. Moreover, in all cases of doubt, the Revenue would have to investigate. The proposals would, therefore, increase compliance burdens on employers, to establish whether they should be able to opt out. The Government think that such a proposition is ridiculous.

Further problems would arise with employers who have about 10 employees, as they might be eligible to elect to opt out in one year, but not be eligible to do so the next. Some employers could move from the exempt to the non-exempt category several times in one year. Do hon. Members really think that employers should be relied on to opt back into the employer payment scheme if they take on additional staff? Again, the proposal would only add another unnecessary complication to the system.

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