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Lord Monkswell: When I saw the amendments on the Marshalled List, I presumed that they were probing amendments which would enable the Government to give chapter and verse as to why small firms were not exempt. However, having heard the noble Lord, Lord Goodhart, and others from the Opposition Benches, it seems that they are serious and that concerns me.
The argument put forward by the noble Lord, Lord Goodhart, contained inconsistencies and omissions. First, he subdivided the global figures for compliance cost assessment into the firms which would pay the WFTC. All firms will have to put in place systems and procedures to enable them to adapt to the new situation. Therefore, the compliance cost assessment will be spread over all firms, not just those which might have to pay the WFTC.
Lord Goodhart: I am grateful to the noble Lord, Lord Monkswell, for giving way. I must point out that the impact assessment splits the recurrent costs from the commencement costs. Installing a new system to cope with the changes would be a commencement rather than a recurrent cost. The figures I referred to were recurrent costs.
Lord Monkswell: Yes, but firms will move in and out of the system. The noble Lord, Lord Peston, pointed out that not only can the size of firms change but their wage bills and the amounts they pay individual employees can, too. That must be taken into account.
Furthermore, the noble Lord, Lord Goodhart, suggested that by allowing some small firms to opt out, the system should be voluntary. I believe that small firms want consistency so that they know where they stand at all times.
They may opt in or opt out. Their circumstances may change and they have to think, "Did I opt out of that or did I opt in?" That is going to be a nightmare for the small firms in which the noble Lord appears to be particularly interested. However, Members of the Committee opposite have not said what this Bill is all about. As I understand it, it is merging the tax and social security systems. It is the first little stage in that process. Therefore, instead of having a vast government bureaucracy--taking money off people in tax and national insurance and having other vast bureaucracies which are shelling out income support, family credit and all other benefits--we actually sort out the national bureaucracy, make it more efficient and bring it together so that we have a one-stop shop operation.
The noble Lord, Lord Goodhart, and the Conservative Front Bench are saying that we are not going to do that, we are going to set up a whole new bureaucracy to pay out working families' tax credits, administered by the Treasury, rather than working through the normal Treasury procedures of the income tax and PAYE and national insurance systems.
I was driven to my feet not only by the details of the argument that has been presented by Members of the Committee opposite but by the fact that they seem to be so serious about it. I dearly hope that this debate can now be called to a halt and that my noble friend can explain to Members opposite what we are about and how it will be beneficial for everybody involved.
Baroness Hollis of Heigham: I would like to speak to Amendments Nos. 29, 32, 33 and 44. As my noble friends have said, these amendments would allow smaller employers effectively to opt out of the tax credit system. Amendments Nos. 29 and 32 would allow employers of fewer than 10 employees to choose to opt out, and Amendments Nos. 33 and 44 would exempt all employers with fewer than 20 employees from paying tax credits.
The first pair of amendments would potentially exempt 70 per cent of all employers except, of course, that the Inland Revenue would not know and would have to negotiate separately with every small business as to whether or not it was electing to opt out.
The second pair of amendments would exempt 80 per cent of employers across the board. As perhaps the Committee may have suspected, I am afraid that the Government cannot accept either pair of amendments. My noble friend Lord Monkswell is absolutely right to say that the point of the Bill is that tax credits will be paid through the wage packet. The amendments seek to take 70 to 80 per cent of employers from the operation of the Bill. In my book, that means that they come close to being wrecking amendments, and I shall ask the Committee to reject them.
The first pair of amendments, in practical terms, because they are concerned with election, would be more difficult to operate. The second excludes more employers and, therefore, more employees from its operation. They are both equally damaging to the spirit and purpose of the Bill.
Two main arguments have been advanced by the noble Lord, Lord Goodhart, and the noble Viscount, Lord Astor. The first is that WFTC is a burden on business and secondly, that employees who, as a result are eligible for tax credits, could find themselves discriminated against and, therefore, without a job. Those are the two arguments that have been advanced this afternoon.
I shall address those arguments in turn. Are they a burden on business? I do not doubt that small firms might wish responsibilities, such as those brought about by WFTC, to go away. I do not doubt, as my noble friend Lord Peston said, that they might have the same approach to the minimum wage, to the application of the Disability Discrimination Act, even to PAYE itself. Yet, in the Government's view, those are proper responsibilities for a business to undertake and, having reached that view, the Government cannot allow businesses to pick and choose which responsibilities they will honour and which they will avoid.
We believe, as my noble friend Lady Turner said, that employees are entitled to those rights, irrespective of the size of the business. Small businesses might have a case if we were asking employers each week to work out from highly complicated tax tables what each individual employee should be paid as wages, what should be paid as a tax credit and then have to repeat that calculation every week; in other words, if we were asking them to do PAYE-type calculations twice over. But, as I hope we made clear on the first day of Committee, all that work of calculation and assessment will be carried out not by the small businesses but by the Inland Revenue. Virtually nothing will be carried out by the employers, who will simply receive a notification from the Inland Revenue as to the additional sum, the daily tax credit, to enter on the pay slip and to pay. I repeat that all of the work involved in calculating the credit will be undertaken by the Inland Revenue and not by the employer. Once that tax credit has been resolved it will be paid at the same rate for six months.
We have always accepted that taking on the responsibility of tax credits means some extra work for employers but we are keeping that to an absolute minimum, which is why we have gone in for extensive consultation. We believe that we have devised arrangements accordingly. As one business representative said, handling WFTC will be very similar to, and certainly no more onerous than, handling a deduction of earnings order now required by the courts. It is a modest responsibility that small businesses, without fuss, sensibly take in their stride.
Baroness Hollis of Heigham: Yes, but the calculation work is undertaken by the Inland Revenue. That is the point I make. Therefore, the work that will be handled by the employer is minimal. The Committee may agree that that work is relatively modest. Nevertheless, the argument of the Opposition is that it is the last straw, adding to the overheads of business in such a way as to undermine its competitiveness. That is hardly the case. I have here the September 1998 figures from Eurostat which compare the non-wage labour costs for business--that is the overheads, the additional costs of each employee over and beyond wages.
In Scandinavian countries, those payroll non-wage costs are on average over 50 per cent. In the Netherlands, they are over 49 per cent; in France and Germany, they are 44 per cent; in Italy, they are 44.5 per cent; in Spain, 38 per cent. The European average is about 42 per cent. One might assume that in the UK those costs might be at the same level as France or Germany at 44 per cent. No they are not. Perhaps then it is at the European average of 42 per cent. No. The UK's so-called burden on business, the average non-payroll labour costs, are 27 per cent, the lowest by far in Europe.
Of course, small businesses will grumble about anything that they are required to do, as employers, which distracts them from running their businesses and therefore, to that extent, takes their eye off increasing their profitability. But that does not mean their view is reasonable, as those Eurostat figures show, or that that responsibility is onerous, as I have sought to argue; it is not. The cost to them is modest. The average cost to all small businesses is about £37 per year, mostly through familiarisation work. I believe that 10 per cent of small businesses are likely to have a WFTC employee at any time.
I shall now engage with the noble Lord, Lord Goodhart, about the statistics that he was pressing upon me. Where a small employer has a WFTC member of staff, and costing the employers time at £20 per hour plus £35 overheads--mostly literature and so on--it will typically cost £135 per year for an employer with up to five staff of whom one is a WFTC employee. It will take five hours a year, which represents six minutes or 70p a week, to handle the paperwork. That is a worst-case scenario. Ninety-six per cent of small employers will spend much less than five hours a year on the paperwork and for those 96 per cent the cost will be much less than £135. Ninety per cent of small firms will spend only about £25 a year and six per cent will spend less than £135.
Despite the remarks of my noble friend Lord Peston, the worst-case scenario is of someone doing the calculations around the kitchen table. Once there are more than five employees, or up to nine or 10, as
The Government are so determined to help small businesses to meet their responsibilities with as little cost and hassle as possible that the last Budget set up the creation of a small business service, with business guides, seminars, publicity, starter packs and guidance. There is also a new telephone helpline service for new employers, offering fast-track support. There is help for small businesses to move away from manual systems around the kitchen table--much as that is beloved by the party opposite--so that new employers can operate a standardised national payroll system to help with their returns.
The Government are also raising the threshold for quarterly payments of PAYE and lowering the small companies' tax rate from 23 per cent to 20 per cent, as well as introducing the new 10 per cent rate for the smallest firms.
On the WFTC, the Government are offering individual guidance, and if necessary a one-to-one visit to small firms, backed by regional Inland Revenue expert support teams. Of course, very small businesses--I refer to the 80,000 or so which do not have a PAYE or NICs liability--will be exempt altogether.
It is precisely because we do not believe that it is onerous and precisely because we have had widespread consultation that not only do we not accept these amendments, but we do not believe that Amendment No. 44, which proposes a two-year delay, is necessary either. Draft regulations have been, and continue to be, discussed in detail with such organisations to ensure that the burden is minimised.
We want small businesses to flourish. We shall help them to flourish. We are generating a climate in which, as my noble friend Lord Peston said, they are flourishing. However, the other side of the huge degree of support that the Government are offering small businesses is that small businesses undertake their proper responsibilities and do not deny employees their rights. It is a contract.
The second argument advanced today--the major argument--is that if some employees attract tax credit and others do not, employers will discriminate against the former and avoid employing them in order to limit their burden. The Government reject that argument. Employers will not be certain whether an employee will or will not be eligible for WFTC. They would need a huge amount of information to decide on potential eligibility. Even then, WFTC may be paid to a partner or via a different payroll. Not only will it be unreasonable for small businesses to seek exemption from tax credits, but it will almost certainly be short-sighted. Small businesses which may employ an employee entitled to a tax credit are, by definition, as
Small firms constantly complain about the quality of the labour force that they can attract at such low rates of pay. Small businesses, quite reasonably, want a labour force that is steady, better trained and reliable. Each new vacancy is costly to fill. A high turnover of staff leads to the cost of constant retraining and often to poor service to the customer. Casual staff, as the Bath compliance study showed, have higher compliance costs than permanent staff. How will small businesses attract and keep good staff when they offer low pay?
From extensive research, we know that the entry wage associated with a job is what matters to applicants. The 1996 report on lone parents on income support, for example, showed that what determined whether they rejoined the labour market was not the availability of childcare, although that mattered, nor the convenience of hours, although that also mattered, but, above all, the entry wage.
We know that entry wages are low, barely two-thirds of the average wage. Indeed, the median wage for lone parents on entry into work before April was £3.42. Wages climb when someone is in work, but if the entry wage is low, potential employees will not even consider the job. If they have children and receive housing benefit, they will consider themselves better off on benefit.
The pay package determines people's willingness to work. The WFTC means that employees with families will enter work at a wage to obtain the child benefit and tax credit of at least £200 a week. If WFTC is not paid through the pay packet and it does not thereby visibly increase the entry wage, the small employer will find his labour pool restricted to those employees not eligible for WFTC. Who are they? They are largely single people, especially the young, the poorly skilled, perhaps the poorly motivated who will change jobs as soon as they can. It is those people to whom the employer would have to turn.
Paying WFTC through the pay packet will allow an employer to recruit a lone parent with heavy childcare costs or an older married man with several children who, because of WFTC, will be able to afford to take jobs with wages on which, otherwise, only young, single and restless people could manage to live. The small employer will attract and keep a better quality (and probably more loyal) labour force.
The Government are playing their part in helping to train and educate potential staff through the New Deal programme. We are offering, as my noble friend said, a wage subsidy to employers to attract and hold staff. In return, the Government can expect small businesses to play their part--not an onerous part--in administering the tax credit.
Finally, I have a brief set of reasons for asking the Committee to reject these amendments. As your Lordships have suspected, they will be very difficult to enforce. Inland Revenue officials tell me, "It will be an
Why? The Inland Revenue will need to know the number of people employed by a particular employer. That figure is based on end-of-year returns and can be a year out of date. Of course, one could ask employees how many staff are employed, but part-time staff are not necessarily likely to know. It is not, as the noble Lord, Lord Astor, said, just a question of ticking a box. The Inland Revenue would have to check that information. In the process, delays would be built into the system and it would take longer for employees to receive the money to which they were entitled.
Whether the figure provided is under 10, as in Amendment No. 29, or the larger figure of under 20, it would present a cliff-edge. Employers can move across that 10 or 20 line several times a year, especially if business is seasonal, or semi-seasonal, such as the hotel trade. In that case individual employees receiving WFTC would find themselves utterly confused, being paid as though they were on family credit for six months and in the next six months being paid through the pay packet, according to whether the employer had taken on another member of staff. With the "cliff edge" in operation, the 11th or 21st prospective employee with the potential to be a WFTC claimant would be unable to be employed. If the 11th or 21st staff member was not a WFTC claimant, would the employer seek to get rid of somebody else currently on the staff and a WFTC claimant? As my noble friend Lord Peston said, a cliff-edge provision is a severe disincentive to business expansion. Most likely, the employer would not expand the labour force or would make "black economy" arrangements.
I believe that these amendments would drive a coach and horses through the Government's intention behind the Bill, which is unambiguously about paying tax credit to show employees that work pays and that tax credits are not income support, but a reward for work. Showing the credit on a pay slip, as an increase in take-home pay, emphasises that. Embedding the tax credit in the tax system will help to break the link with the social security system.
That is why we do not believe it right to exempt between 70 and 80 per cent of employers from this Bill, which is what the amendments would do, and virtually the whole of rural Britain. The credits are not onerous. They will help to offer small employers what they say they most need if their business is to flourish; that is, good, reliable staff. For those reasons I hope that the Committee will reject these amendments.
Lord Astor of Hever: Perhaps I can pick up one point the Minister made; I am not sure that she read carefully the exact wording of our amendment. She implied that we are trying to deprive employees of something. We are not. We are merely suggesting that
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