Tax Credits Bill

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Mr. Hoban: If a number of employees who all have the same skills compare their wage packets, they may find that one gets significantly more than others

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because of his family circumstances and the way in which the tax credit has been processed. That may confuse employees about their value to the employer and cause discontent among the work force.

Mr. Luff: That is a powerful point that I had not properly considered until now. I used to run a medium-sized business. One of our real difficulties was precisely that: people comparing pay packets and reaching judgments about their work. It is an immensely difficult problem in a small business, which typically wants more flexibility in setting its pay rates than some larger businesses operating to agreed pay scales.

Mr. Clappison: Those who are interested in this important aspect of the payment of the tax credit through the employer would do well to study the speech on Second Reading by the right hon. Member for Birkenhead (Mr. Field) in which he set out the conclusions of his research into the effect that such information leaking out has on the work force as a whole.

Mr. Luff: I am grateful to my hon. Friend for prompting my memory. I hope that the right hon. Gentleman will be able to express some of his concerns on Report.

Another issue is fraud. I am sure that my hon. Friend will mention that later, but it is an important part of these two clauses. The chamber of commerce says:

    ''Collusion between an unscrupulous employer and employee could lead to an agreement to pay a deliberately low wage and make the amount up through benefits.''

That was another point made by the right hon. Member for Birkenhead. With the greatest respect to the hon. Member for West Renfrewshire, these powerful points are not nostalgic rubbish. They are highly contemporary points about how we conduct the fight against poverty. The Government are quite cavalier in their regulatory impact assessment. They say that the implementation costs should be less and that existing payroll systems should not need to be significantly altered and they give lots of unconvincing reassurances. Even it the costs are a little less than those of the present system, which causes deep concern among employers in Worcestershire, the opportunity should be seized to make them considerably less. Marginal changes are not good enough.

A market gardener in my constituency told me a year or so ago that as soon as he got to spending more than half his time doing Government paperwork and less than half his time growing, he would give up market gardening. He was getting perilously close to that point. I say again to the hon. Member for West Renfrewshire: this is not nostalgic rubbish. This is people fighting on a day-by-day basis in highly competitive markets who need every opportunity to create jobs. We are not talking about wicked employers. These small businesses usually have a good relationship with their work force and want to help them. They are anxious to give them time off and provide them with any moral, physical or spiritual assistance that they can, because it is a small team

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pulling together. They want to create more jobs and to employ more people. The Government must make it easy for them.

I should like to remind the Committee of just two more cliches. The first is willing the end but not the means. The Government are willing the end of poverty but not the means to fight it. The second, and more important, is killing the goose that lays the golden eggs, which is what the Government are in danger of doing. Many small businesses in my constituency face intense market pressures and look with dismay at the rising tide of regulations—and I refer to my original point of order. I hope that the Government will not dismiss their concerns as being those of wicked employers who want to grind the faces of the poor. They are caring, compassionate people who want to help their employees and employ more people, but could be denied the chance to do so by measures such as these.

Mr. Clappison: This has been an important debate on an important part of the Bill. We have had some significant contributions from Conservative and Liberal Democrat Members, and we are all grateful to the Minister for the way in which she has assiduously listened to them. She will give us her considered response shortly. I was interested particularly in her recognition that employers were complying with the provisions. She nods at that, and we remember the National Association of Citizens Advice Bureaux survey on which those assertions were based. The recognition will be useful to bear in mind when we reach later provisions in the Bill. Given that she believes that employers are complying so well, we shall push for easing the burden on employers and securing a little more flexibility for them, although that is for the future.

The payment of tax credits is an important subject, and I will add the perspective from my constituency. My hon. Friend the Member for Mid-Worcestershire (Mr. Luff) talked about Worcestershire. Manufacturers in Hertfordshire are no different and encounter the same problems of having to comply with an ever growing regulatory burden that causes a distraction and in some cases leads to a reluctance to take on additional labour.

The hon. Member for West Renfrewshire must understand that we are not saying that trying to alleviate poverty is a bad thing, but when one does it in a way that causes additional burdens for employers and undesirable side effects, one must look at whether it is a good way of operating. My hon. Friend the Member for Arundel and South Downs was right in his comments and asking whether the Bill provides for the best way of making the payments available to workers on low pay.

Jim Sheridan rose—

Mr. Clappison: I will give way to the hon. Gentleman, but he may want to hear one fact first, because I know that he is concerned about this. Manufacturing industry, in particular, cites the system as one burden on it, especially on small and medium-sized employers. The background to that is a massive

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job loss in manufacturing industry of 350,000 jobs since 1997, accelerating last year to 111,000 jobs. Hon. Members are looking puzzled at that. The figures are not from employers.

Ms Buck rose—

Mr. Clappison: I will give way to the hon. Lady as well, but she may want to reflect on the fact that those figures come from the GMB, which is running a campaign to draw attention to the fact that one manufacturing job is being lost every minute.

Jim Sheridan: I do not suggest for a minute that running a small business is easy, and I have some sympathy for people who do it, because of the difficulties that they face. Does the hon. Gentleman accept that beneficiaries of tax credits work for companies such as McDonald's and Burger King and contractors that work for local authorities? By no stretch of the imagination are McDonald's or Burger King small companies.

Mr. Clappison: We can reach common ground to the extent that paying working families tax credit through the payroll is more of a burden to small employers than it is to large ones. Many small employers, from my constituency and other parts of the country, have told me that it has an important effect on their administration costs and, cumulatively with other burdens, can govern their decisions about whether to take on more workers or lay off some that they already have.

Ms Buck: I was not doubting the figures that the hon. Gentleman cited, which I am prepared to accept, but I want to quibble about the fact that he said that job losses in the manufacturing industry are due to the administrative burden of the working families tax credit. I do not think that, with some of the serious problems that British manufacturing has faced, such as the strength of the pound, it could be said that the working families tax credit has been the problem. He and his colleagues have also made a great deal of the issue of small businesses. I do not think it would be fair to say that job losses in manufacturing industry have been predominantly in small firms.

Mr. Clappison: I agree with the hon. Lady to the extent that, to be fair, this is part of the wider economic background. I part company with her on the emphasis that I place on the effect on small and medium-sized enterprises. The burden on them increases the marginal costs, particularly for small and medium-sized employers, and affects the decisions that they take.

One manufacturer who had employed about 50 workers but recently downsized to 44, leaving the machine room empty, said to me, ''Given the amount of regulation that I have to comply with, why should I employ another soul?'' That is the feeling of many manufacturers. That manufacturer was not in my

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constituency, but I have been pressed by small and medium-sized manufacturers in my constituency on this point.

I am not saying that tax credits alone, or the administration of student debt, or the stakeholder pensions, or any of the rest, are the problem in themselves. It is the cumulative burden of regulation. That is why we need to have important debates such as this, to examine each and every piece of regulatory burden that is placed on employers and consider whether yet another element of burden is justified, and to put some sort of cost on it.

I now come to what the industry itself says about this matter. The Government's regulatory impact assessment assures us that there will be a reduction in the burden placed on employers. They are trying to make a virtue of that. They have suggested a figure of £11 million a year for the reduction of costs for employers, but we must consider that against the background of a current burden of about £90 million to £100 million, so we are talking about only a relatively small part—about 10 per cent.—of the present burden.

It is not clear that the reduction really will be of that order in any case. Of course, the Minister has been at great pains to say that she does not yet know, because—properly, in her view—she is not prepared to disclose to the Committee her view on the tapers and the rates at which the benefit will be set. We cannot say exactly say how many new people are coming into the system. We know that people who have been receiving the child tax credit allowances have been going out of the system, but a whole new group of people in childless households will be coming in. We do not know exactly how many there will be.

Looking at the mechanics, the Government's regulatory impact assessment set out the ways in which the burden will be reduced: they think that employers not having routinely to complete an earnings inquiry form will save them about £1 million a year; the move towards annual awards about £9.5 million; and certificates of payment about £400,000.

I am slightly hesitant about this, because the Government do in fact say that there may be an increase in the regulatory burden as a result of some of the changes that are being made. Paragraph 2.17 of the regulatory impact assessment says:

    ''The only change that might generate a cost for employers is that some employers might be asked to adjust the value of tax credit payments to a worker within the year, as the new tax credits system will respond to in-year changes in recipients' circumstances. The impact of this can only be estimated once the system is up and running and so will be assessed as part of the evaluation of the new tax credits.''

I can understand the justification that has been offered, but I am a little hesitant about regulatory impact assessments that cost the reductions but not the increase. We need to hear more from the Minister about that, even if it is only a ball-park figure.

Industry itself is concerned about this. In the submission that we have received from he CBI, it specifically states:

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    ''Employers will need to change the payment rate if an employee notifies the Inland Revenue of a change in circumstances and this may even require the payment of different rates in one pay period.''

The CBI proposes that as a main justification for seeking the payment of administrative costs, which we will deal with under another clause. There are clearly swings and roundabouts to all this, in that there will be reductions and increases in the administrative burden. As a result of the changes to the tax credits, some people will not be paid by employers, and others will be paid for the first time. We cannot gainsay that overall a substantial burden on employers will remain. My hon. Friend the Member for Arundel and South Downs is right to table amendments that question whether such a burden should be placed on employers. We should also ask whether there are other ways of paying tax credits that would not involve that burden.

I share the scepticism of the hon. Member for Northavon about whether paying the tax credit through the pay packet would have an impact on employees, rather than paying it in another way. The Government seem to have adopted that argument to some extent, because they now propose to pay the child part of it in a different way and not through the pay packet. I doubt whether that makes enough of a difference to justify imposing the burden on employers, although the Government claim that it does. The burden on employers is substantial and cumulative, and affects many employers in my constituency. We need to consider the proposal urgently, given the job losses especially in the manufacturing sector, and it is right that we have considered it in the debate.

11.45 am

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