|Child Support, Pensions And Social Security Bill - continued||House of Commons|
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PART IV: NATIONAL INSURANCE CONTRIBUTIONS
The current position
443. Earnings-related National Insurance contributions (NICs) are paid by both employees and employers on all cash earnings which reach a set amount. These contributions go into the National Insurance Fund to pay for contributory benefits. However, employees pay no NICs on most non-cash earnings (payments, or benefits, in kind). For a fuller account of the NICs system, refer to the glossary.
444. Since 1991, Class 1A NICs, which are an employer-only charge, have been liable on car and fuel benefits provided for the employee. But most other non-cash benefits are provided NIC-free. Some benefits, which are readily convertible assets, such as shares or gold bars, as well as non-cash vouchers, are already subject to Class 1 NICs paid by both employers and employees. Such benefits are set out in Schedules 1A, 1B and 1C to the Contributions Regulations 1979.
445. All benefits in kind are subject to income tax as emoluments either under section 19 or Part V of the Income and Corporation Taxes Act 1988 (ICTA).
446. The Chancellor announced in the March 1999 Budget that all taxable benefits in kind not already subject to NICs would become liable to a Class 1A charge from April 2000. This will align more closely the tax and NICs treatment of provided benefits such as private medical insurance, beneficial loans or assets transferred to the employee.
447. This will implement a recommendation of the Task Force chaired by Martin Taylor, ex-Chief Executive of Barclays plc., in the report The Modernisation of Britain's Tax and Benefit System.
The measures in the Bill
448. The new measures contain provisions which are intended to make all non-cash earnings received by directors or employees earning £8,500 or more per year subject to Class 1A (employer-only) NICs, unless they are already subject to Class 1 NICs, or Class 1B NICs (if they are minor benefits which are included in a PAYE Settlement Agreement, an administrative arrangement under which an employer accounts directly to the Revenue for tax and NICs on minor or irregular payments).
449. The extended Class 1A charge follows the shape of the existing charge on car and fuel benefits. The Class 1A due will be calculated using the valuation figures already required for tax purposes which an employer enters on a P11D form - a report to the Inland Revenue of the value of benefits in kind provided throughout the *tax year to each employee. This is intended to keep extra reporting requirements to a minimum.
450. The new measures provide powers for Treasury Ministers to make regulations to except particular items or reduce the Class 1A liability where appropriate. The clauses also give powers to prescribe penalties for failure to pay Class 1A NICs correctly and other matters, such as dates and forms of records, surrounding collection of the NICs.
451. A further provision allows any emolument received from employed earner’s employment which is subject to Schedule E tax also to be treated as earnings for National Insurance. This is intended to be used to clarify the NICs treatment of items bought using a company credit card or similar form of purchase. It could also be used for tax/NICs alignment, such as to introduce the NICs regulations relating to the proposed new all-employee share plan.
commentary on clauses
452. Currently, employees pay primary Class 1 National Insurance contributions (NICs) on all cash earnings they receive between the *Lower Earnings Limit (LEL) and the *Upper Earnings Limit (UEL). Employers pay secondary Class 1 NICs on all cash payments above the earnings threshold (equal to the Single Person's Tax Allowance) which they pay to employees with no UEL applying. Non-cash benefits are excluded in regulations from the computation of earnings subject to Class 1. But some, such as bonds and gemstones, are brought back into a Class 1 NICs charge. Employers also pay Class 1A NICs – at a rate equivalent to the Class 1 secondary rate – on the value of car and fuel benefits which are provided to their employers for their private use. Employees pay no NICs on such benefits.
Clause 57: Contributions in respect of benefits in kind (Great Britain)
453. This clause enables all taxable benefits not yet subject to NICs to be brought within a Class 1A NICs charge.
454. Subsection (1) makes a change to section 1(2)(b) of the *Social Security Contributions and Benefits Act 1992 (the "Contributions and Benefits Act") to reflect the fact that the Class 1A charge will no longer apply to car and fuel benefits.
455. Subsection (2) replaces section 10 of the Contributions and Benefits Act, which sets out the existing Class 1A charge, with a new section 10.
New section 10: Class 1A contributions: benefits in kind etc.
New section 10(1) defines the circumstances when a Class 1A contribution is due. An earner receives an emolument which is chargeable to tax under Schedule E from employed earners employment to which Chapter II, Part V ICTA applies – i.e. the earner is a director or earns £8,500 per year or more. And all or some of the emolument received is exempted from, or not liable to, Class 1 NICs then Class 1A NICs are due.
New section 10(2) and (3) provides that the person liable to pay the Class 1A NICs (usually the employer) is also the person who is liable to pay secondary Class 1 NICs in that *tax year – or would be if there were any earnings liable to Class 1 NICs.
New section 10(4) provides that the amount of Class 1 A due is the amount of the emolument not subject to Class 1 - as per subsection (1) - multiplied by the Class 1A rate for the tax year.
New section 10(5) provides that the rate for Class 1A is the same as that for secondary Class 1 NICs.
New section 10(6) provides that Class 1A is not due on any emoluments which have been included in a PAYE Settlement Agreement for tax and NICs purposes.
New section 10(7) provides that, for section 10 only, the emolument subject to Class 1A shall amount to the valuation of the benefit for tax purposes.
New section 10(7)(a) disapplies reliefs or allowances which, for income tax purposes, the employee may be able to claim against their tax under ICTA sections 198, 201, 201AA or 332(3), which allow deductions for certain types of expenses. These will not affect the valuation for Class 1A NICs purposes where the benefit is provided partly for business and partly for private use.
New section 10(7)(b) excludes from Class 1A benefits where the whole amount of the emolument would be deductible for tax because it has been provided wholly for business purposes. An example would be a fax machine provided only for use when engaged in the employed earner’s employment.
10(8) provides regulation-making powers for the Treasury to amend the effect of 10(7). It will allow, should this be needed, the matching by regulations of any alterations to relevant tax legislation. For example, if a new ICTA section introduced a new relieving provision which needed to be included for the coherence of the Class 1A NICs scheme this could be done in regulations.
New section 10(9) provides regulation-making powers for the Treasury to exempt certain persons or types of emolument from Class 1A liability or reduce Class 1A liability. The Government anticipates using these powers, for example, to mirror items already exempted from Class 1 NICs in regulation CAPut!’, such as certain forms of training; or to reduce liability where the cost of providing a benefit is split between more than one company.
456. Subsection (3) introduces new subsection 4(6) of the Contributions and Benefits Act. This provides regulation-making powers for the Treasury to treat any amount, which is the value of a benefit subject to Schedule E tax, as earnings from employed earner’s employment. As such it will maintain the existing use of the power in subsection 4(6) in relation to the provision of conditional and convertible shares. It further allows the Treasury to prescribe the time and manner in which the earnings are to be treated as being paid.
457. An example of how this power could be used is to prescribe that where an employee buys or obtains goods or services by use of a company credit card which are immediately transferred from the company to that individual the amount involved in the purchase shall be liable to Class 1 NICs. Also, it would permit future alignment of the tax and NIC treatment of payments to employed earners. For example, it is possible that this power may be used to mirror in NIC legislation the tax provisions relating to the new all-employee share plan, proposed in the 1999 Budget. Consultations on its details are being held. The tax provisions are expected to be included in the coming Finance Bill.
458. Subsections (4) to (6) make consequential changes to existing legislation.
459. Subsection (7) provides that the Class 1A charge shall come into effect from 6 April 2000 to match the beginning of the next tax year even if the Bill does not attain Royal Assent until after that date.
460. Subsection (8) provides that statutory instruments made under any of the powers in the new section 10 may be backdated to the beginning of the tax year in which they are made. This will allow the details of the Class 1A charge to become operative from the beginning of the tax year. This provision is likely only to be used in future years to mirror a change in tax legislation in a Finance Bill for that year.
Clause 58: Collection etc. of NICs: Great Britain
461. Currently the payment of Class 1A National Insurance contributions may be made by one of two methods - via the Inland Revenue Pay As You Earn (PAYE) system, or direct to the Inland Revenue National Insurance Contributions Office. With the extension of Class 1A to all taxable benefits, there will be a new single payment and collection method. Employers will make one annual return for their Class 1A to the Accounts Office where they already send their PAYE payments, accompanied by a separate payment slip.
462. This clause makes minor amendments to current legislation to support the operation of the new method. The detail of the new payment method will be in regulations.
463. Subsection (1) explains that the following subsections (2) to (5) make amendments to Schedule 1 to the Contributions and Benefits Act 1992.
464. Subsection (2) amends paragraph 7(2)(b) to include the application of the Taxes Management Act 1970, section 105 (evidence in cases of fraudulent conduct), in relation to certain penalties. This brings the PAYE payment method (for payment mostly of Class 1 contributions) and the new Class 1A payment method into alignment.
465. Subsection (3) substitutes a new paragraph 7B(2)(e) to provide for regulations to determine the date from which interest is to be calculated, in cases where a Class 1A contribution is not paid by the due date. This aligns with the wording in paragraph 6 – relating to NICs collected with PAYE tax.
466. Subsection (4) inserts a new sub-paragraph (5A) into paragraph 7B, which provides for regulations to be made which may apply provisions contained in Part X (Penalties, etc.) of the Taxes Management Act 1970.
467. Subsection (5) inserts a new paragraph 7BA which provides for regulation-making powers to prescribe the circumstances under which a payment or repayment of contributions or interest due to a person under Schedule 1 may be offset against any other contributions liabilities which the person may have. For example, a Class 1A overpayment might be offset from a secondary Class 1 liability.
468. Subsection (6) removes paragraph (1)(j) from section 8 of the Social Security Contributions (Transfer of Functions etc.) Act 1999. This removes from the list of decisions by officers of the Board of Inland Revenue the question of liability to pay interest under paragraph 7B(2)(e) of Schedule 1. The application of interest to late paid Class 1A contributions will apply automatically, as it does for tax and Class 1 contributions collected with PAYE tax.
469. Subsection (7) provides that the effect of subsection (6) is only in relation to interest which accrues on Class 1A contributions due in respect of tax year beginning 6th April 2000 and subsequent years. This therefore means Class 1A contributions due under provisions in the new section 10 of the Contributions and Benefits Act (see clause 57(2) above).
Clause 59: Contributions in respect of benefits in kind (Northern Ireland).
470. This clause mirrors the provisions in clause 57 for Northern Ireland.
Clause 60: Collection of NICs (Northern Ireland)
471. This clause mirrors the provisions in clause 58 for Northern Ireland
PART V: MISCELLANEOUS AND SUPPLEMENTAL
Clause 61: Tests for determining parentage and Clause 62: Declarations of status are described in Part 1 of these notes covering the Child Support measures.
Clause 63: Expenses
472. This clause authorises expenditure incurred under this Bill and any increase in expenditure incurred under any Act in so far as that increase is attributable to any provision of this Bill.
Clause 64: Repeals
473. This clause gives effect to Schedule 7, which repeals certain existing legislation as a consequence of the measures in the Bill.
Clause 65: Commencement and transitional provisions
474. This Bill introduces a large number of measures, not all of which will come into force at the same time. Subsections (2) and (3) provide for the provisions listed in subsection (1) to be brought into force, possibly on different days and for different purposes, by order made by the Lord Chancellor (in the case of provisions specified in subsection (3)(a)) or otherwise by the Secretary of State. Subsection (4) provides that for the measures relating to the reduction and withdrawal of benefit (clauses 49 to 54) this power also includes the power to pilot the measures by bringing the provisions into force on different days in different areas. Those measures which are not specified in subsection (1) will come into force on Royal Assent.
475. Subsection (5) provides the power to make any necessary transitional arrangements in relation to the measures on selection of trustees and of directors of corporate trustees. Subsection (6) provides that regulations made under subsection (5) are to be made by negative instrument, and subsection (7) enables the regulations to (among other things) make different provisions for different classes of cases, impose conditions or create exceptions.
Clause 66: Short title and extent
476. The measures in the Bill will apply throughout Great Britain. This clause sets out which of the provisions of the Bill will extend to Northern Ireland. The provisions specified in subsection (2) are concerned with
(a) an amendment of a provision about member nominated trustees which itself extends to Northern Ireland;
(b) War Pensions;
(c) consultation with the Social Security Advisory Committee about regulations relating to loss of benefits;
(d) liability for Class 1A National Insurance Contributions in Northern Ireland, and collection of contributions there;
(e) calculation of the contributions equivalent premium in Northern Ireland; and
(f) this clause, and the provision for expenses and commencement etc. in this Part of the Bill, and repeals in Acts which apply in, or extend to, Northern Ireland.
Where necessary, the Schedules are described in the main commentary.
FINANCIAL EFFECTS OF THE BILL
478. The financial effects of the measures in this Bill are set out below. They are in April 1999 prices and represent current best estimates. In some cases these are inevitably broad, indicative figures only.
479. The measures which have the most significant financial effects are Child Support reform, the introduction of the State Second Pension and the extension of Class 1A National Insurance Contributions to benefits in kind not already subject to a charge. The impact of the remaining measures is relatively minor.
480. Overall start-up costs are estimated to be approximately £125m in total. Of this total, around £100m is for reform of the Child Support scheme (excluding the cost of payments made under the Private Finance Initiative in respect of a new computer system) and approximately £25m is for preparing for the introduction of State Second Pension.
Ongoing administration costs
481. Ongoing running costs will increase by an estimated £11 m per year in total. This breaks down between the individual measures as follows:
482. In the case of Child Support, it is anticipated that in the medium to longer term there would be a slight reduction in administrative running costs, on a case-by-case basis as a result of the simpler system. No significant increase in running costs as a result of the Occupational Pensions, Housing Benefit and Inspectors' Powers measures has been identified.
483. In the first three years of operation (2001/02 - 2003/04) there is expected to be a cumulative decrease in benefit expenditure of around £25m. This decrease is due to the Child Support reforms as none of the other measures are expected to have a significant impact on programme expenditure in the short term.
484. In the long run, the benefit expenditure costs of the Bill are estimated to rise overall, due to the additional benefit costs of the State Second Pension. The cost will depend on which approach for changing the contracting-out regime is adopted. Under the first, it is estimated that benefit costs will have increased to approximately £4.4 bn a year in 2050. The equivalent cost for the second approach is estimated at £6.2 bn a year. The cost of other measures is expected to be negligible by comparison.
485. The reduction in benefit expenditure attributable to the Child Support reforms will fall to the Consolidated Fund, while the longer term increase in benefit costs through the State Second Pension falls on the National Insurance Fund (NIF).
486. In addition to the benefit expenditure effects falling on the NIF, the measures in this Bill also cause a net reduction in the NIF revenue. The National Insurance Contributions measures are estimated to increase revenue by £225m. Most of this will go to the NIF, but a small part is allocated to the National Health Service. However, the increase in contribution income to the NIF is more than offset by additional rebate costs from the introduction of State Second Pension. The scale of the reduction depends on the approach chosen: the greater the benefit expenditure falling to the NIF, the smaller the reduction in NIF revenue and vice-versa. Under the first rebate approach, it is estimated that in 2002/03 there will be a net reduction in National Insurance Contribution revenue, including that part allocated to the NHS, in the order of £0.7bn and around £15.1bn by 2050. The equivalent figures under the second approach are £0.1bn and £11.6bn.
487. The earliest that the new child support arrangements introduced by this Bill will begin to operate is expected to be late 2001, because of the scale of the changes in the operating procedures and the Department’s computer systems the measures require. The new rules will apply first to new cases. Parents with an existing liability will be transferred at a later date, when it is clear that the new system is operating effectively, and there will be a five-year transition period as liabilities are phased to the new rates.
488. It is estimated that the proportion of lone parent families on Income Support (IS) receiving maintenance will at least double by 2005/06, and the proportion of maintenance due which is collected will increase from around two-thirds to three-quarters or more by 2002/03. Overall, the reforms are expected to result in reduced IS and Jobseeker's Allowance (JSA) expenditure over the first five years of the scheme by approximately £330 m. Annual savings are expected to reach £110 m in the fifth year.
489. The introduction of the child maintenance premium for existing cases will, however, increase benefit expenditure during the same period by £65m in a full year. The simpler system of rates is also expected to result in lower average liabilities (for example, a non-resident parent currently liable to pay £38 a week on average could expect to pay an average of £30.50 if the system were in place today). This will result in an additional cost of £5 million in 2005/6 for existing cases.
490. Taking account of these factors, the overall effects of the reform are expected to result in cumulative programme savings of approximately £100 million during the first five years, with annual savings expected to peak at £40m in the fifth year (2005/6) and then tail off in the long run.
491. The reduction in spending over the first five years is expected to cover the expenditure needed to pave the way for reform, restructuring the Child Support Agency (CSA) and investing in staffing – estimated at around £100m by 2002. The reduction in benefit expenditure will also cover the initial increase in running costs estimated to be around £3.5m.
492. There will be additional costs of introducing a new computer system. The contract to provide the new system will be let under Private Finance Initiative terms. The Department is currently in talks with the preferred supplier, the Affinity Consortium.
State second pension
493. Net financial effects will depend on the numbers that contract-out of the State Second Pension into private arrangements. The numbers will in turn depend on the attractiveness of the contracting-out terms. A consultation paper Structure of Rebates for the State Second Pension, which seeks views on two options for changing the contracting-out regime to reflect the introduction of State Second Pension, was issued on 29 November. The two options have different cost profiles in relation to both the National Insurance rebates and State Second Pension expenditure.
494. The first option gives extra rebates to reflect the new three-part accrual within State Second Pension and provides a state top-up for all those in contracted–out provision earning below £9,500. This should mean that all those currently contracted-out remain so and that the additional rebates will act as an incentive for individuals to join funded arrangements in particular Stakeholder Pension Schemes. In broad terms this option increases the short term rebate costs but will reduce the public expenditure costs in the long term because individuals will be contracted-out and, therefore, will not receive as much Additional Pension from the State Second Pension.
495. In the first two years after implementation, the State Second Pension is not expected to increase existing estimates of expenditure for the State Earnings Related Pension Scheme (SERPS). In the third year, 2004/05, it will result in a negligible increase to estimates of expenditure. Entitlement to Additional Pension under the State Second Pension will take some time to build up from when it is introduced in 2002 (for example, very few carers of pre-school age children who will benefit from the State Second Pension will reach state pension age before 2020). Assuming that everyone earning over £9,500 has contracted-out of the State Second Pension by 2030, the net programme cost of the State Second Pension by 2050 is expected to be £4.4bn. This takes account of savings on income-related benefits as more people are lifted off means-tested benefits in retirement.
496. The amount of additional revenue forgone due to increased rebates, taking account of the introduction of Stakeholder Pension Schemes, is likely to be, in the initial three years from 2002/03, £0.9/£1.8/£2.1 bn rising to £15.6 bn in 2050.
497. The effects are different under the second option. This leaves rebates for occupational schemes based on a 20% uniform accrual, as now under SERPS and provides a State Second Pension top-up for those earning below £21,600. It gives enhanced rebates to contracted-out personal pension schemes and a State Second Pension top-up for those earning below £9,500. This means overall that there are less rebate costs but greater State Second Pension expenditure.
498. As under the previous option, in the initial period following implementation, the State Second Pension is not expected to increase existing estimates of expenditure for SERPS, apart from a negligible increase in the third year. Again, assuming that everyone earning over £9,500 has contracted-out of the State Second Pension by 2030, the net programme cost of the State Second Pension by 2050 is expected to be £6.2 bn. This also takes account of savings on income-related benefits as more people are lifted off means-tested benefits in retirement.
499. The amount of additional revenue forgone as a result of increased rebates to personal pension schemes for the initial three years is £0.4/£1.1/£1.4 bn, rising to £12.1 bn in 2050.
500. The administrative set up costs are estimated to be £25m by the end of 2001/02. Operational costs are estimated to be £7 m in 2002/03 and £3 m in 2003/04. The longer term, steady state costs are expected to be £2m from 2004/05. The set up costs are mainly due to IT development costs, in particular, changes to the National Insurance Recording System (NIRS2), with additional expenditure going on items such as staff training, publishing and helpline costs.
501. Only one of the measures has any direct financial effect on Government expenditure. Other measures have a financial impact upon business and these are described in the Regulatory Impact Assessment, published alongside these notes.
Commutation of protected rights
502. The measure to permit the commutation of contracted-out rights on the grounds of ill-health will require changes to employer guidance and the National Insurance Recording System (NIRS2). This will lead to a one-off cost of £70,000 in the latter half of 2000.
War Pensions Appeals
503. It is anticipated that the extension of appeal rights will increase the number of appeals by fewer than 1,000 each year and will increase programme costs by less than £1m over the first three full years following implementation in October 2000. The long-run costs are estimated at £1.5m per year (costs falling to the Consolidated Fund).
504. The administrative costs of the new arrangements, including costs to the Lord Chancellor's Department, are estimated to be in the order of a maximum of £0.8m in the first year of implementation (2001/02) and up to £1 m per year thereafter. These costs relate to the cost of processing the increased volume of appeals.
505. The other measures (introduction of new time limits, and amending the composition of the Central Advisory Committee on War Pensions) will not entail additional programme or administrative expenditure.
Community Sentences and Benefits
506. It is not possible to provide a meaningful forecast of the likely impact on benefit expenditure of these measures. Estimates of the benefit effects will depend on the numbers in receipt of a relevant benefit who commit a breach, after the measures have been introduced. Data collected by the Home Office indicates that in England and Wales, around 25,000 people are currently referred to Court for breaching the terms of their community sentence. The Department does not have data on how many of these are in receipt of a benefit covered by these measures. It is clear, however, that any effect on expenditure will be downwards, as a result of the withdrawal of benefits. The upper limit on possible savings is around £5 m annually. This estimate is based on assuming that benefit is withdrawn or reduced for a period of four weeks from 25,000 people who are in receipt of a relevant benefit and have breached a community sentence. This assumption does not take account of the possible award of hardship payments which would reduce the level of savings. If the policy achieved the effect of preventing breaches of community sentences, there would be no change in benefit expenditure.
507. The combined administrative costs to the Departments of Social Security and Education and Employment of setting up the systems to administer the measures, and running the pilot phase, are estimated at around £1 m. This includes enhancing computer systems nationally as there is no facility to limit a change to the system to a particular area.
508. The combined annual running costs on a national basis are estimated at around £530,000.
Clarification and alignment of Inspectors’ Powers
509. The measures in the Bill are intended to clarify and align inspectors' powers, making them more robust. Due to the nature of the changes, it is not anticipated that there will be an increase in inspections by the Benefits Agency as a result of this legislation. However, following the alignment of Local Authority powers with those available to the Benefits Agency, it is estimated that Local Authority inspections could increase by around 10%. It is estimated that this increase will be absorbed by current staffing provisions. The legislation also allows for closer working between Benefits Agency, Local Authority and Child Support Agency investigators. Any financial or manpower effects derived from closer working will be subject to appropriate distribution of resources.
Housing Benefit Overpayment Recovery
510. This provision will not result in any additional costs to central government. The subsidy paid to Local Authorities for Housing Benefit expenditure and administration already takes account of an element of expenditure caused by fraud, and Local Authorities retain any recovered overpayment of benefit.
511. There is some risk that Local Authorities may not be as successful in recovering overpaid benefit from the fraudulent tenant as from the landlord, but it is anticipated that the potential reduction in recovered overpayments will be minimal.
National Insurance: extension of Class 1A to all taxable benefits in kind
512. The effect of extending the Class 1A National Insurance Contributions (NICs) charge to all benefits in kind not already liable to a NICs charge is estimated to be an increase in National Insurance Contribution revenue of £225 million per year on an accrual basis from 2000/2001.
513. Operational expenditure in 2000/2001 is expected to be around £3.5 million, of which £3 million are implementation costs of IT changes and staff training. In 2001/2002, there will be further implementation costs of about £1.5 million. There will also be administrative costs of £5 million relating mostly to compliance and banking work, as the first payments are due from employers. These ongoing costs are expected to reduce to £4.5 million in the following year, 2002/2003.
PUBLIC SERVICE STAFFING EFFECTS
514. Overall, the measures in the Bill are not anticipated to have a significant effect on the level of public service staffing. It is expected that, with the exception of the start up and implementation of the Child Support reforms and the State Second Pension, where the measures generate additional work, this will be absorbed within existing staff resources.
515. In the case of the Child Support measures, temporary staff may be recruited in order to prepare for and implement the reforms, but the long-term impact on staffing is not known at this stage. There is likely to be a small increase in staff in the Benefits Agency and Inland Revenue as a consequence of the State Second Pension of around 150 to 250 over and above planned recruitment levels. This is expected to be required over 2001/02 and 2002/03. In the very long-term, some of these additional resources will no longer be required, but it is not possible to estimate at exactly what stage this will occur.
516. The effect on staffing levels resulting from the implementation of the proposals on Community Sentences and Benefits will be assessed following the pilot phase.
|© Parliamentary copyright 1999||Prepared: 2 December 1999|