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Lord Goodhart: My Lords, I am not surprised that the noble Baroness has asked us to reconsider Amendments Nos. 1 and 3, and I doubt that she will be surprised by the fact that, although we have reconsidered them, we think that they were right and proper amendments.

These amendments provide for payment of working families' tax credit by the Inland Revenue direct rather than through the wage packet in the case of small employees. The amendments were moved by me and supported by the Conservatives on Report.

The purpose is to give employers with fewer than 10 employees the right to ask the Inland Revenue to make payments direct. It is an opt-out, not an exclusion, and for that reason it would, to a large extent, get round the difficulties of those employers whose number of employees fluctuates above and below 10. Those employers in that situation would obviously be unlikely

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to wish to opt out because of the inconvenience to them of alternating between having to be in the scheme and out of it.

There are already some circumstances in which payments of WFTC will be made direct by the Inland Revenue; for example, where a couple agrees that payment should be made to the caring parent. So there does not appear to be any great point of principle involved in enlarging the list of cases in which payment is made direct.

The Government insist that payment through the wage packet is necessary to increase the incentive effect of the tax credit. I do not believe that. It is true that the tax credit will give people greater incentive to take a job but that is because of the considerable increase in the total family income which will result from the increase in the tax credit. The fact that the income may come in two dollops, not one, cannot make a ha'p'orth of difference. I believe that workers are sufficiently intelligent to know that the extra money which they receive does not come from their employer's own pocket even though it comes through the wage packet. Therefore, if there is any stigma effect in having an income which comes partly from the Inland Revenue, that stigma will not be eliminated by this scheme.

Against that, payment through the wage packet will impose significant burdens on many small employers. As the noble Baroness said, there are some 825,000 employers with fewer than 10 employees. The draft regulatory impact assessment suggests that about 100,000 of those will employ someone entitled to the tax credit. Therefore, the great majority will not. But payment through the wage packet for that 100,000 who are so entitled will involve significant extra time and cost. The impact assessment statement suggests that the recurrent costs to small employers who must pay the tax credit will be £370 per year. That figure looks to be somewhat on the high side and it may be that it is not entirely accurate. However, the impact would be quite substantial.

I do not believe that the Inland Revenue would find great difficulty in finding the employers with fewer than 10 employees in order to find out whether or not they were entitled to opt out.

Since Third Reading in your Lordships' House, as the noble Baroness mentioned, the Government have devised a scheme to enable some initial payments to be made by way of vouchers. That will deliver a limited degree of help to new small employers but the scheme is minimal and, as I understand it, is not intended to cover the recurring costs which are the main burden. It is simply intended to cover the start-up costs. The CBI certainly believes that the scheme is inadequate and would prefer smaller firms to be exempt, as we proposed.

Furthermore, 38 per cent of employers with fewer than 10 employees still use manual payroll systems. The working families' tax credit will be a particular problem for them. They will not be helped by any software that the Government are able to provide for those who have automated processing systems for wages.

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We therefore took the view that our amendment imposed no detriment on employees, unlike, for example, the exclusion of small employers from an obligation to designate stakeholder pensions for the benefit of their employees under the Welfare Reform and Pensions Bill which we believe would be detrimental to employees. Our amendment relieves small employers from a significant burden without any corresponding detriment to employees. We regret, therefore, that the Government have not seen fit to accept a useful amendment which, in our belief, does no damage to the principle of the Bill.

However, we now reach the point of considering whether to insist on the amendments. Insisting on amendments is a powerful weapon. It is not quite, perhaps, a nuclear weapon, but it is certainly a highly explosive one. That weapon needs to be reserved for occasions of outstanding importance: in football terms, "Premier League amendments". These amendments are important, certainly Division 1, but at the end of the day I feel that they do not quite make it into the Premier League. We do not believe, therefore, that this is an appropriate issue on which to force a battle between your Lordships' House and the other place and we do not propose to insist on the amendments.

Lord Astor of Hever: My Lords, it is not every day that I find myself in agreement with spokesmen from the party of the noble Lord, Lord Goodhart. However, as far as concerns this amendment, I am in complete agreement with what the noble Lord so eloquently said. We, on this side, feel that the Government are wrong. I agree with the noble Lord, Lord Goodhart, that the amendments are right and proper.

The Government are sending a message to the business community that they can expect a return to the sort of highly destructive, business-unfriendly regime last seen under the Labour government in the 1970s. The Minister recognised that there would be some extra cost to employers. However, the Government have under-estimated the administrative and financial burden that WFTC will create, particularly as there is no reimbursement of costs to firms on the lines of that operated for maternity pay.

No less a person than one of "Tony's cronies", the noble Lord, Lord Haskins, chairman of the Better Regulation Task Force, has said publicly that the Government have under-estimated the impact on small businesses. The Better Regulation Task Force was set up by the Prime Minister specifically to cut red tape on business. The Government therefore appear to have two contradictory objectives. On the one hand, they tell the business and small business lobby groups that they want to reduce the burdens on business. If that is really the case, why not accept the amendment? On the other hand, their real objective seems to be to increase massively time wasting and cumbersome burdens. Any noble Lord tempted to doubt that should read The Price of Fairness from the Centre for Policy Studies. The authors say that Labour's social legislation will add £4.6 billion to business costs and eradicate 880,000 jobs.

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The Minister mentioned the voucher scheme. Do the Government feel that this scheme is sufficient to alleviate the administrative burden which the WFTC will create? This is an area of special concern to the CBI which, as the noble Lord, Lord Goodhart said, is concerned that the vouchers will not reflect the cost of administering the tax credits.

In Committee, the Minister stated that virtually no work will be carried out by employers. She reinforced that by saying that work for employers will be minimal. If that really is the case, why is it necessary for employers to attend seminars, as she mentioned? Do the Government now accept that administering the tax credits is more complicated than the Minister first said and now needs explaining in detail at seminars?

How can the Government possibly hope to persuade hard-pressed businessmen and women to attend these seminars? Do not the Government feel that the time of such people would be better spent running their businesses, providing jobs and creating wealth? Certainly, that is the message which the Trade Secretary has been trying to send out.

Finally, will the Government review the situation a year after the legislation comes into force? It will surely be necessary to check that there are not the excessive administrative burdens and costs on businesses, particularly small businesses, which they themselves fear will happen?

Baroness Carnegy of Lour: My Lords, I rise briefly, in view of all that has been said by my noble friend and the noble Lord, Lord Goodhart. It seems extraordinary that the Government continue to maintain that it is not appropriate for small employers to be exempted from this provision. Small employers feel very strongly about the matter. Surely, the Government know that. I understand that they have established in their minds the need for employees to see the tax credit arrive with their wage packet. I do not believe that employees are as dumb as the Government think. They will understand very well that they are receiving an income supplement because they are in a job, however they receive it. It is unfortunate that the Government, who are flying a very strange flag, disregard the anxiety of employers who have under 10 employees and feel strongly about this. I am sorry about the Government's decision.

Baroness Hollis of Heigham: My Lords, I thank noble Lords for their contributions. I regret that so far the Government have not been able to persuade them of the propriety of our position. However, in response to the first point, we firmly believe that the entry wage of people going into work should be seen to be a qualitative leap from the benefits they would otherwise receive. This applies particularly to lone parents who will make up perhaps over 50 per cent of those on WFTC. The best way of doing that is to break the link of that tax credit with its former benefit wraparound, which is family credit. We believe that, and the research we commissioned indicates that our views are correct.

People want jobs where the entry wage, which they will receive through the wage packet, is a qualitative leap from what they would otherwise enjoy from benefit

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books, giros and so on. To some extent the proof of the pudding will be seen as this develops. However, the research from the Institute for Fiscal Studies already suggests that if we bring this alongside other improvements by government changes to national insurance and the like, in the longer term we can expect to see 250,000 extra people coming into work. That is from an independent organisation. We obviously hope that those figures could well be surpassed. However, we believe, as all our research shows, that it is the entry wage, and the perception of what comes in the pay packet, that determines the willingness of people to return to work.

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