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Lord Higgins: Is it not the case that the very lowest paid do not gain at all under these proposals?

Baroness Hollis of Heigham: I am sorry, I do not understand what the noble Lord means. A person who works 16 hours a week and is paid whatever sum--but obviously, with the minimum wage, at least £3.60 an hour--will be entitled, if the family is a couple with children or qualifies for DPTC, to access to the working families' tax credit. In certain circumstances, some of which I have described, that person may not be paying tax, which is the reason for saying that the payment could not be handled through the PAYE system but has to be included as a separate item on the pay-slip. I hope that that is clear to the noble Lord.

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The Inland Revenue is confident that it could design a new enhancement to the PAYE system which could cope with providing regular support and even paying money out as long as pay remains stable. When pay changes, so does the amount of tax withheld. If pay fluctuates greatly, then the PAYE system reacts in response and will not deliver the even flow of reliable money that the policy envisages. It will sometimes deliver too much, sometimes too little. The over-payment or under-payment in each pay period could be quite marked, sometimes even taking back tax credits that had already been given.

The inconsistencies are particularly marked where taxpayers are not firmly in one rate band, where there are gaps in entitlement or where the level of the award changes during the tax year because the awards last for only six months. We know that there is considerable change in circumstances between each six months' award of family credit. Family credit seldom remains constant between one award period and another.

In the end, it was generally concluded in discussion with employers, firms, businesses and the federations that the PAYE system could not deliver these tax credits. That was the conclusion not just of the Inland Revenue but also of the consultative group, including business and payroll specialists, which looked at the issue in detail.

I have gone into the matter in detail because I know from previous meetings that Members of the Committee are concerned about the issue. I therefore thought it might be useful to put the detail on the record.

Lord Goodhart: I am most grateful to the noble Baroness for giving way. Is it not a fact that the noble Baroness has just explained very clearly why both the aims and the mechanisms of the working families' tax credit are so different from the system of taxation that the working families' tax credit cannot be treated as a tax credit at all? That is the whole point.

Lord Skelmersdale: Before the noble Baroness answers, perhaps I may add a point. If there were a genuine tax credit system, surely all that would be necessary would be to have a minus amount of PAYE before one started?

Baroness Hollis of Heigham: If we follow the argument of the noble Lord, Lord Goodhart, I think he is taking us down to a basic citizen's income, in which we pay either pluses or minuses. We know that a basic citizen's income requires a tax rate of something like 50 per cent and even then does not satisfactorily cover housing costs. It may be that his party no longer espouses that system. That would be the only way that the system he proposes could deliver what he is suggesting.

I have tried to address what I believe to be the three arguments brought to the Committee this afternoon from the Opposition benches. It was suggested that this was merely a re-badging exercise. I have tried to argue that, far from being a re-badging exercise, it represents a new but profoundly held commitment by this Government. Under the previous government giro cheques for income

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support, and so on, were handed out and people were told, "Go away and come back in 16 years' time". The whole thrust of the Government's policy, in terms of the New Deal, the single gateway for work and the pilot schemes for young people, disabled people, lone parents and older people is that the best pathway out of poverty and out of bumping along at the bottom of society is to have access to work.

We know that one of the reasons why people are sometimes reluctant to seek work, over and beyond issues of childcare and skills and training, is the relatively low entry wages compared to the level of benefit they may currently enjoy by virtue of the number of children they have, their disability or their housing support. We are seeking to overcome the perception in people's minds that the best way of helping them is simply to give them more income support. Instead, we are trying to make obvious, transparent and attractive the move from being on benefit to being in work. In so doing, the in-work support which we currently give them will be reshaped and refocused to become a tax credit, such that it pays to work and that it pays when in work to work more, to gain more and to keep more. This is not a re-badging exercise; it is the basis of the entire philosophy of this Government. Shame on the previous administration for leaving so many people for so long in the twilight unnecessarily. I hope that the noble Lord will withdraw his amendment.

Baroness Carnegy of Lour: Before the noble Baroness sits down, she has not addressed the precise point of the amendment, which is that the Government are calling something a tax credit when it has nothing to do with tax. It is a misnomer, and a misleading one. It may well be that, now he realises that, which I do not believe he did before--and I can understand that--the noble Lord, Lord Peston, will think of a way round this problem to help the Government. Will the noble Baroness reconsider the name of this credit? It is not a good thing for the Government to mislead people. They should not call something by a name which does not apply.

Lord Peston: Before my noble friend replies, and before the noble Lord, Lord Higgins, tells us what he intends to do about the amendment, perhaps I may put on my old-fogey hat and say that I wrote an article 35 years ago in which I said that the distinction between public expenditure and taxation was entirely arbitrary and that any clever person could dress something up one way or the other. I do not believe that the noble Lord, Lord Higgins, is saying anything different. He does not seem to be claiming that anything substantial follows from his amendment; he just prefers one set of words to another.

My noble friend is saying--and this is the substantial issue--that someone who goes to work will now end up in a better net position as a result of going to work than would otherwise be the case. That is the substantial issue; it is what the policy is about. It seems to me that that net improvement could quite reasonably be called a tax credit. I do not believe that the words matter. What

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matters is what my noble friend the Minister is saying, which is that it is hoped that there will be a substantive improvement in policy that will make people both more employable and more willing to work. That is, I assume, what most Members of the Committee want. I did not understand the noble Lord, Lord Higgins, to be saying that his amendment was about anything other than words. I am never one to denigrate the use of words, but it is not what the policy is about, as my noble friend pointed out.

Lord Skelmersdale: What I want, and what I believe everyone wants, is a credit for working paid through the wage packet. I have no argument with the Minister on that. The only question I would ask her is the following: if the Government had chosen to use a different agency to pay this credit, would it still be known as a tax credit? That is the issue.

Baroness Hollis of Heigham: If it is to be paid through the wage packet by whom is it to be paid except by the Inland Revenue?

Lord Skelmersdale: The Government can give instructions to the Department of Social Security or any other agency to make the payment through the wage packet. As under the Bill, the Government can give instructions for employers to pay it through the wage packet. It does not have to be done by the Inland Revenue. I accept that the Government have chosen this route for very good reasons. Nonetheless, if they had chosen some other route there would have been no possible justification for calling it a tax credit.

Baroness Hollis of Heigham: The noble Lord advances an extremely interesting proposition. Are the Opposition Benches now entirely happy that this should be paid through the wage packet and that it should be a subsidy, as it were, for people who are marginal to the labour market and therefore need this support in order to move from benefit into work? It is not proposed in most of the remaining amendments that payment should be made through the pay packet. However, I am sure that we shall argue that point when we reach it.

Lord Skelmersdale: Before the Minister goes too far, I should remind her that I have very limited or no connection with my own Front Bench. Therefore, she cannot possibly cast as Conservative policy anything that I say.

Baroness Hollis of Heigham: One was aware of divisions of opinion within the Opposition Front Benches at the other end of the corridor. I had not realised that such divisions extended to the first and second Benches on the other side of the Chamber. But if that provides for a variety of views and not simply a monolithic recitation of briefs provided by the CBI or anyone else in the course of our debates, I am sure that we shall all be the wiser--if not wiser, certainly enriched--by the division of views. However, the noble Lord, Lord Higgins, may like to have words with his colleague afterwards. As I understand it, the proposition

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of the noble Lord is that this money should be paid through the DSS. Therefore, in future employers will work with the Inland Revenue in regard to their tax and national insurance contributions but when it comes to this other item the DSS must know about their pay roll, the amount of pay and the number of employees. The DSS would have to check for fraud and possible collusion, carry out the inspection and handle that information.

Does the noble Lord seriously suggest that employers would welcome the DSS bringing to bear all its traditional forces of investigation so that the same small businessman would have to give information to the Inland Revenue for one reason and similar information to the DSS? Does he suggest that there should be two sets of bodies to supervise what goes on, two sets of investigations, two lots of inspection and two lots of penalties?

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