Tax Credits Bill

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Mr. Flight: I readily appreciate the point that the hon. Gentleman makes, but I point out that if they have a tax code, claimants must have annual negative income tax returns, as I suggested. I am surprised that the Committee did not conclude that that, at the end of the day, would be a lot tidier and more reliable than the arrangements being opted for. As we discovered when debating them earlier, they are likely to create a lot of muddle and greyness. There is no ready way of reconciling to ensure that all claimants have provided the Revenue with the information that it needs to assess them. We also discovered that people would themselves be quite unable to understand what they were entitled to.

Mr. Webb: As is so often the case, we are wrestling with the tension that in the British tax system it is not the custom for people, apart from high earners and the self-employed, to fill in annual tax returns. I would not want to force that on more people, given the choice.

My point is that the Government talk the language of integrating taxes and benefits, and have gone a little way down that track, but there is a road block beyond which they will not go. Given the choice between harmonising individual assessment and family assessment in the Bill, they went for family assessment. It will never be possible to deliver it through the PAYE code, so there will always be an administrative burden if it is delivered as a separate payment by employers.

The welfare of individuals and employers is enhanced by giving people a choice, and our communities will also be enhanced, a point to which we shall return. I hope that the Minister will tell the Committee why she wants to deny people that choice.

Mr. Mark Hoban (Fareham): I am concerned about the burden that the Bill will place on small businesses particularly and businesses in general. I raised this point on Second Reading and I want to return to it today in the context of this group of amendments and the clause stand part debate.

We want responsibility for the payment of tax credits to move back to the Government, where I believe it belongs, to ensure that there is no

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unnecessary burden on business. The regulatory impact assessment for the Bill stated that the cost to business would fall to about £90 million and that the majority of the £9.5 million saving would arise from moving from six monthly to annual claims. I welcome that reduction, which provides some relief to small businesses, but that cost does not show the true picture.

We must remember that employers will receive not just the coding notice that they receive for employees at present but, for those claiming tax credits, a separate piece of paper that will need to be processed to ensure that the correct tax credit is paid to the employee. Therefore, employers will need to meet the cost of processing each transaction that is a consequence of the Bill. One of my concerns is that, every time there is an in-year assessment, the employer will have to amend the employee's details on his payroll system and change the credit that he receives and there is a processing cost attached to that.

To an extent, some of my concerns were addressed in last week's debate about thresholds, when the Minister said that, as thresholds would be quite wide, there would be only a small requirement to submit an in-year assessment for changes in income. But until the thresholds have been set, it is difficult to assess the changes of income and the consequent in-year assessments on the employer's payroll costs and the number of transactions that he needs to process.

Again as we discussed last week, a number of other circumstances, particularly changes in family circumstances, give rise to changes in tax credits during the year. In its report on tax credits, the Institute of Fiscal Studies gave an idea of the quantum of changes that we might see as a consequence of some of the other changes. Based on evidence from the labour force survey, it suggested that at least 360,000 adults in couples with children and 90,000 lone parents change employment status within three months. Each one of those changes will trigger a cost to the employer, because the new employer will have to set up the tax credits for that employee. At least 840,000 adults in couples with children and 180,000 lone parents change employment status within 12 months, so again a large number of people are coming through the system. Each time somebody moves job, a new payroll cost will be incurred by an employer.

In terms of changes in family make-up, at least 225,000 couples with children break up and at least 200,000 lone parents start to cohabit within 12 months, again a change in family circumstances that will give rise to a change in tax credits for the employee and an additional cost on business as a consequence. Costs could be removed from the employer if the Inland Revenue required direct payment of all tax credits to the employee and did not require the employer to process those costs.

Another aspect of the Bill that will have an impact on businesses and the number of people falling within the scope of the Bill will be the number of claimants. That number will depend on the rates and tapers, information which, despite the valiant and ultimately fruitless efforts of the hon. Member for Northavon,

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the Paymaster General kept a jealously guarded secret during last week's debate—I suspect that she will not change her mind this week.

Depending on the generosity of the Treasury, the number of claimants could go up, putting an additional burden on business as every new claimant registers as a transaction cost. Ministers are forcing a cost on to small businesses that is ultimately unpredictable and unquantifiable and is entirely dependent on the Government's policy objectives.

Jim Sheridan (West Renfrewshire): I thank the hon. Gentleman and his hon. Friends for this nostalgic trip back to the dark days of his Government, whereby any legislation enhancing the life of people in the lower quartile of our society suddenly becomes a burden on businesses. The hon. Member for East Devon (Mr. Swire) said that the working time directive is a burden on industry. It is ridiculous in this day and age to say that about legislation that allows workers to work for less than 48 hours a week or sets a minimum wage, which takes people off benefits so that they do not need tax credits. It is nostalgic rubbish.

Mr. Hoban: I am grateful to the hon. Gentleman for his intervention. All that we are suggesting is that by shifting the burden from employers to the Inland Revenue, his Government can still achieve their objectives in terms of alleviating poverty and improving work incentives without imposing the cost on business. That is a reasonable position to take.

Payroll processing costs on small businesses are significantly higher than those on large companies. A business with between one and four employees incurs an average cost of £288 per employee, but for a large company employing more than 5,000 people it falls to £5 per employee. In small businesses, the payroll is often done by the owner-manager, a bureau service or the company accountant. Significant costs may be incurred, as well as a significant distraction in terms of time from the valuable task of job creation and wealth creation to which my hon. Friend the Member for East Devon referred.

Mr. Swire: I am grateful to my hon. Friend for pointing out that we are not necessarily opposed to the list that I mentioned, but to the idea of small businesses, rather than the Government, being responsible on those occasions. Further to the burden that he is describing, does he see any difference between the 7 million people who are paid weekly and the 16 million who are paid monthly?

Mr. Hoban: It depends on how the payroll is compiled. In the case of an automated payroll system it probably does not matter if it is weekly or monthly, but where it is compiled manually, as it is in many small businesses, costs may arise.

My hon. Friend talked about the additional burdens that are placed on businesses by the earlier legislation to which the hon. Member for Northavon referred. A business with just one employee, perhaps a self-employed person operating as a sole trader, may, when

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faced with the administrative burdens that arise from employing another member of staff, wonder whether it is worth while. Some of the costs that are imposed, especially those of processing and administration, may act as a barrier to further recruitment, thus diminishing the number of opportunities for people to move from unemployment into work, which is the Government's objective in introducing the tax credits system. Shifting the burden of paying tax credits back to the Inland Revenue might make it more attractive for small businesses and small traders to recruit more members of staff to grow their business and create the wealth and jobs that the country needs. Time and again, the Government have imposed burdens on business, and the amendments present an opportunity for them to relieve small businesses of a burden that could have big effect on the lives of those who run them.

11.15 am

There are three solutions to the problem of imposing additional costs on businesses. The first, to which my hon. Friend the Member for Arundel and South Downs referred in his opening remarks on the amendments, is to move to a negative income tax so that there is only one coding to process, not the standard PAYE coding and a separate piece of paper for the tax credits. I will be interested to see how the Paymaster General responds to that, because to have only one coding to process, not two as at present, would be a very straightforward way for an employer to reduce the initial transaction costs.

The second solution, which the CBI suggested yesterday in its briefing to the Committee, is to compensate employers fully for the cost of administering tax credits. There is much merit in that. It would meet some of the objections of small businesses, but would impose an additional burden on them because they would have to submit a claim form and get a cheque back from the Revenue to meet their costs. I am also uncomfortable about it because it would not remove the time burden of payroll costs from small businesses. I would rather that the time burden of complying with the measure was pushed back on to the Inland Revenue.

The third solution, which I favour, is direct payment to the claimant, as the amendments suggest. The Paymaster General has already said that child credits will be paid directly to the main carer by the Inland Revenue, so it would require a relatively small extension of the system for it to cover childless couples in receipt of tax credits. I do not see that implementing that would be onerous on the Inland Revenue.

When there has been discussion on that idea, the Government have argued that it would break the clear link between the incentive to work and joining the work force. They might use that argument on this occasion, but the very process of leaving jobseeker's allowance to move to the working tax credits, completing additional paperwork and submitting the forms, would show clearly to the claimant that a change had arisen solely because of their movement from being unemployed to being in work. That

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change, together with the extra line on their bank statement marking a payment from the Inland Revenue, would demonstrate the incentives again.

I am not sure that the Government are right in saying that the proposal would act as a disincentive for people to move from benefits into work. The IFS report states that the Government also hope that

    ''as a tax credit rather than a welfare benefit, it should reduce the stigma associated with claiming in-work support, and encourage higher take-up''.

However, the IFS concludes:

    ''There is no evidence, though, that payment in this way improves work incentives or reduces stigma''.

The evidence collected by the CAB suggests that payment through the wage packet caused substantial difficulties for some recipients of working families tax credit, especially if employers refused to pay, or refused to increase hours above 16 a week so that people could not claim the tax credit. There are some significant problems still arising on the payment of tax credits through the payroll by employers.

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