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Baroness Hollis of Heigham: My Lords, I hope that the noble and learned Lord appreciated that it was delighted warmth.
Lord Howe of Aberavon: My Lords, it was not unwelcoming, but I detected a degree of surprise. That was understandable because it is probably almost 20 years since my days in the Treasury when I last grappled with anything as complicated as this issue.
If one goes 21 years further back to November 1964 and to my maiden speech in the other place—here the battle on these issues was joined between Lord Joseph and Lord Houghton, alas both deceased—I asked for a solution to the problem with which we are grappling. I look back with affectionate nai vety at the sentences:
- "The solution ... must be one of which all in need can take advantage. It must be ... simple".—[Official Report, Commons, 12/11/64; Col 1239.]
During the time I grappled with these matters, I worked alongside much greater experts than myself who are still around. My noble friend Lord Cockfield—alas not with us at the moment—has forgotten more about this than the rest of us have ever known. He still remembers more than we shall ever know. My noble friend Lord Higgins is another in that category. I therefore touch upon the subject with some diffidence.
I began by asking myself where the money is coming from and how will it be raised to finance this and other munificent matters. In rather an old-fashioned way, I sought a copy of the Budget speech from the Printed Paper Office. I found it a remarkably unrevealing document in all the crucial matters with which we are here concerned. A strange feature is that in its 30 printed pages the symbol for the pound does not appear. It is spelt out in some strange fashion as an Anglo-Saxon word—a "pound". I wondered whether that meant that the Chancellor's word processors do not have the "£" symbol on them. Are they perhaps already equipped with the euro, or even the dollar since his glance is more often in that direction? One would like to know why.
If one looks at the more serious details one finds that the only figure given of the yield, the burden or the net figure of what is produced for any of the tax changes is a single figure for the net yield of all the changes. It is a figure of between £6 billion this year and £8.3 billion in 2005. But the cost, the burden or the changes imposed by particular tax changes are never to be found. One has to go therefore to the Red Book. That has changed a good deal since I last had a little Red Book in my hand. In my last two years in office the two that I produced were 48 and 44 pages in length. They cost just under £5. The volumes produced by the Chancellor this time, on pages twice as large and multi-coloured, are 500 pages in total at a cost of £50. I do not believe that the intelligence available reflects the increase in activity and expenditure.
One of the more notable discoveries is the hugely important part played in raising the revenues for these changes by the scarcely disclosed burden of the 1 per cent payable on national insurance contributions by the employer, the employee and the self-employed. Of the £8 billion raised by that, £4 billion—this is the important point on the revenue-raising side—comes from the employers' payroll tax. I seem to be almost alone in reacting to that by saying, "Haven't I seen that somewhere before?" Indeed, one finds that one has seen it somewhere before. Way back in 1976 when the noble Lord, Lord Healey, was under pressure from the International Monetary Fund, lo and behold he introduced a 2 per cent national insurance surcharge which was payable by the employers. In 1978, still under pressure from the IMF, that was increased by a further 2.5 per cent, as he intended. But the Liberals rode to the rescue and the Lib/Lab pact had the effect of reducing that 2.5 per cent to 1.5 per cent. So we ended up with a 3.5 per cent national insurance surcharge, known as "Healey's tax on jobs". That is what we are now revisiting in this particular burden. I am very anxious that that idea does not spread, if it is not already deeply rooted in the Chancellor's mind. It is 1 per cent this year; it reached 3.5 per cent when they were last at it.
Between 1982 and 1984 in the Budgets introduced by my noble friend Lord Lawson and myself, we got rid of that. It is very important to understand the potential danger of this burden on employers and, above all, on jobs, which is the engine that is driving the generosity to which my noble friend Lord Saatchi has referred.
That is how the money will be raised, but how will it be distributed, and with what side effects? The Minister has talked quite often about an integrated system. Integration is the flavour of her speech if not of the substance which she has been describing. As my noble friend Lord Saatchi has pointed out, the regulations to be made under the Bill set about defining a whole range of "elements", as they are called, defining a married couple, defining what kind of unmarried couple can be benefited as though they are a married couple and defining "relevant" incomes with at least nine different "relevant factors", with power to prescribe a great deal more. All those features are to be prepared in a separate code of regulations, as
my noble friend points out, unscrutinised by either House of Parliament but quite separate and distinct from those already in operation for pay-as-you-earn under the income tax legislation.Speaking quite personally as chairman of the steering committee of the tax law rewrite project, this year we want to rewrite in a more intelligible form all the primary legislation which deals with PAYE. The secondary legislation on that topic is itself so unintelligible that that is also being rewritten, not by ourselves but by the revenue authorities. So at the same time we are rewriting in simpler terms legislation on these very topics dating back to early in World War II. Alongside that, under the legislation now before us power is being given for a completely separate code which addresses the same question: who is entitled, in what way, and to what amount? All the methods of enforcement, discovery, revision and appeal are to be set out in regulations.
However, I cannot believe my eyes because we are now generating two completely separate distinct codes addressing essentially the same elements. I ask myself: how disintegrated can an integrated system become?
The other feature which has already been pointed out by my noble friend Lord Saatchi is the very simple point that this network of claimable benefits will be available to those earning up to £58,000 per year. Only 10 per cent of families will fail to qualify for the examination of claiming or not claiming the benefits available under these provisions. They will be paying marginal rates of 48 per cent in the band between £50,000 and £58,000. It will cover of course childless couples as well and pensioners with a special credit. In saying that, one does not object to the attempt to direct benefits in that way, but it really is an extraordinary jungle. I mentioned possible side-effects, and there are two in particular. The first is the effective abolition of the independent taxation of married women—even if they are not actually married, as it happens, because unmarried couples can qualify in the same way.
In 1968, I was a member of a committee that produced a booklet with the bizarre, patronising title, "Fair share for the fair sex". It was a long time ago and a bit old-fashioned, but the objective was the same. One of the many objectives that we set out was independent taxation for women. In my second Budget in 1980, I produced a Green Paper on the subject. My noble friend Lord Lawson in due course—by 1990—implemented it. That was one occasion on which both my noble friend and I could bask for a moment in the admiration—if your Lordships can imagine—of our spouses and others for having done the right thing.
The introduction of the proposed system, applying to nine families in 10, will require married couples when considering whether or not to apply for such grants to aggregate not only their income but their working hours. All will be revealed. The concept of independent taxation will disappear altogether.
Secondly, what is almost recreated is what was at the heart of Nye Bevan's case on behalf of all people with experience of its impact in South Wales between the
wars—the case against the household means test. That is in effect being reintroduced across the canvas—not only will there no longer be single taxable units but there will be a single means test. That is much to be regretted.Towards the end of the Minister's peroration following her helpful description, she said that as a result of the changes, the Government can deliver a joined-up system. There is a huge inaccuracy at the heart of that. The Government cannot deliver anything; the system will be administered by employers through the pay-as-you-earn system. That is at the heart of the idea of an integrated system. If it is to be done, it needs to be done with much more sensitivity. The Government will not be delivering it: employers will struggle to deliver it; a random sample of people will struggle to claim it; and it will fail to achieve the objectives that we all share.
The noble Baroness may ask me to explain how I would set about achieving those objectives in a different way. We should return to focusing the system on much narrower targets, not spread out the target across the entire income range of the population. We should concentrate on simple objectives—as my noble friend Lord Saatchi often suggests: raising the tax threshold.
The Budget also freezes the threshold for income tax and national insurance. By that very act, a large number of people are brought back into the tax system. Alongside the reduced rate band, that means that still more people are in the tax system than if the threshold were raised.
I must stop reminiscing and draw to a close. In my second Budget I was able to scrap the reduced rate band—the 25 per cent band—introduced by the noble Lord, Lord Healey, and substantially raise thresholds. The reduced rate band is of almost no value at all in helping those in poverty. It is a tranche of lower tax income available to everyone and, by its very existence, it lowers the tax threshold. By that one simple change, I reduced the number of people at the Inland Revenue by 1,300, with a corresponding reduction in the private sector.
So that is my approach: narrow the targets; restore something like the standard benefits available under the simpler system; and make the system manageable, instead of proceeding down this fluctuating path in which any objective that is fulfilled is rapidly swept away.
I say all that with great regret because, as I said at the outset, the objectives are ones that we all want to achieve. The fact that we have all struggled with them for so long shows how difficult it is to achieve them, but the way in which the proposals have been introduced means that in several respects we shall be moving in the wrong direction. I say that with much regret.
4.4 p.m.
Baroness Noakes: My Lords, it is, of course, extremely difficult to follow a speech such as that of my noble and learned friend Lord Howe of Aberavon,
whose huge experience and expertise as a former Chancellor and current commitment to the tax rewrite project make him especially well-qualified to comment on the Bill. However, from my much lower base of expertise, I hope to be able to contribute to the debate.Let me say at the outset that I have no problem in principle with bringing together the tax and benefits systems. But that approval in principle is subject to several important provisos. First, the Government should not pretend that benefits are anything other than benefits. They like to score benefits as if they were negative taxation—thereby fiddling the figures. I am aware that accounting conventions are rather dull material and not normally the stuff of our consideration as Bills pass through the House, but I hope that we can make an exception for the Bill. It is time that the Government stopped cooking the books.
My second proviso is that it is logical to merge the administration functions only if the concepts and basic approaches to measurement and coverage are the same. Here the Bill fails almost completely. The Bill takes the existing social security approach to benefits and sticks it alongside an entirely different approach in the Inland Revenue. The social security and tax elements will come together only in payment of the benefit—where the Inland Revenue will again use businesses as its unpaid tax administrators to shoulder most of the burden.
We should be in no doubt that the systems are quite different. For example, the Inland Revenue deals with taxpayers as individuals. Each submits a return and they are genuinely treated as individuals. My noble and learned friend Lord Howe told us of his contribution to the creation of independent taxation. Obviously, there are some instances in which marriage is relevant—for example, capital gains tax treatment of transfers of assets between spouses—but that does not result in individuals being treated other than as individuals in their own right.
The benefits approach contained in the tax credit system is quite different. In the social security system, the concept of a household unit reigns. If a person is married, he or she loses his or her individual identity for tax credit purposes. Even worse, the household unit also applies to unmarried couples—although illogically not to same sex couples. So the Inland Revenue will deal with individuals as such for tax purposes but as household units for tax credit purposes. It will have to enquire not only into marital status but also the status of relationships which are not the result of marriage.
Perhaps I may give your Lordships another example of a huge difference between the two systems. The tax system taxes income according to a series of statutory provisions laid out in Acts of Parliament. There is a system of schedules and cases for income with clear rules attaching to them. Of course, from time to time, it is necessary for Finance Acts to introduce new rules to ensure that all sources of income are brought into charge. But the system is statutorily based and hence receives detailed scrutiny before it is enacted.
The tax credit system, rooted as it is in the social security system, does not do that. Entitlement to credits is based on a concept of "current year income", but that has no firm statutory base. Rather, as we have heard, it rests on regulations. For example, the regulations under Clause 7 can do several things. They can prescribe income to be treated or not treated as being income for a particular tax year. They can prescribe that a person has income that he does not have or does not have income that he in fact has. The Inland Revenue has no equivalent provision for tax purposes except some specific provisions—usually for anti-avoidance purposes—that are clearly spelled out in Finance Acts.
So a tax credit system might make sense if it took the existing tax basis and fitted social security benefits within it. Or, it might make sense if a more complex synthesis of the tax and social security systems had been attempted. In either case, the taxpayer or benefit recipient would be approached in the same way. The Bill does not do that, and we are left with a real puzzle as to why the Government are bothering to transfer benefits to the Inland Revenue.
One reason may be that the Inland Revenue is more efficient than the Department for Work and Pensions. Certainly, the Inland Revenue has a better track record of introducing new computer systems. Given the department's unimpressive attempts to introduce the new child support system, one might well conclude that it might be beneficial to call that a tax credit and transfer it the Inland Revenue. The regulatory impact assessment makes no claims for greater efficiency; it just says that the Inland Revenue's costs will go up now and costs for the Department for Work and Pensions will go down. It does not comment on the relationship between them. Another reason might be the cosmetic desire to pretend that tax credits are negative tax. Nobody is really fooled by that.
I have come to the conclusion that the real reason is territorial aggrandisement by the Chancellor. The Board of Inland Revenue is his department. The chairman of the board reports to the Chancellor. The tax credit system enables the Chancellor to spread his control way beyond the traditional boundaries of the Treasury. It is classic Treasury power play. As a former secondee to the Treasury and as someone who has worked with the Treasury for many years, I am aware that the prevailing culture and belief is one of superiority over every other department. The combination of that mindset with the ambitions of the current Chancellor is a dangerous one constitutionally. I have concluded that we are not considering the Tax Credit Bill for any sound reason. The right course would be to reject it.
If we do not reject it, we must consider its provisions carefully. As my noble friend Lord Saatchi has already said, there is a big difference in the use of regulations between this Bill and tax legislation. Of course the Inland Revenue uses regulations, but it does so less frequently. PAYE regulations are one example, but others are few and far between. This Bill, however, has 44 clauses in Part 1, 20 of which create regulation-making powers. Virtually the whole of Part 2 transfers
a load more regulation powers to the Treasury or the Inland Revenue. Regulations made under the Bill are subject only to the negative resolution procedure. I am sure that we will want to consider that carefully in Committee.It is fundamentally unsound to conduct virtually the whole of the tax credit system by way of regulation. In addition to reduced parliamentary scrutiny, it results in a system that is inaccessible to the people affected and their advisers. The tax credit system is complicated, and the use of regulations makes it more so. We know that the practice is to issue regulations and, if they are wrong or need to be improved, to issue more regulations amending the earlier regulations and so on. I remind the Minister of the child support order that we debated on 11th April. That order had nine substantive regulations, amending nine different orders, derived from powers in two Acts, one of which had amended a previous Act. Ordinary people and their advisers do not stand a snowflake's chance in hell of coping with that degree of complexity.
The Minister will not expect me to pass up an opportunity to refer to burdens on business. Tax credits are such a burden, especially for smaller businesses. The regulatory impact assessment says that businesses will save £11 million. However, with 300,000 employers, that works out at £37 each, excluding the cost to those businesses of upgrading their payroll system. Even that, however, misses the real point. The tax credit systems are already a huge burden on employers. Whether or not the Government fund the cash-flow implications of the tax credit system, the operation of the system is the real imposition. In its recent paper, The Red Tape Menace, the Institute of Directors called for the Government, rather than small and medium-sized enterprises, to pay tax credits. Businesses the length and breadth of this land will say, "Amen" to that.
4.15 p.m.
Baroness Andrews: My Lords, it gives me great pleasure to speak in the Second Reading debate on the Bill, although that pleasure is tempered by the triangulation of expertise on the Front Benches and the fact that I follow a distinguished speech from the noble and learned Lord, Lord Howe of Aberavon. It is a historic Bill, and it would not be so radical or so inclusive had it not been for our Minister in this House, who champions the cause of poor families inside and outside the House.
I am disappointed by the scepticism that has been expressed on the Benches opposite. I heard from another group of experts yesterday in the All-Party Children Group. They represented the whole poverty lobby that has worked closely with the Government to prepare the Bill. First, they spoke, without equivocation, of their appreciation of the way in which their concerns and their expert views about the delivery mechanism and the changeover to tax credits had been listened to during the consultation process. They expressed delight that the Government had gone further—in some respects—than they had anticipated to put money in more accessible places. They
expressed their conviction that the abolition of poverty—notwithstanding the debate about numbers—is a non-negotiable part of government policy and said that they were happy to support that. They were confident that the Budget would make "a real difference" to the poorest families.I have sat through many anti-poverty strategy meetings in the past 20 years. I have never heard such an unprecedented vote of confidence in a government. We have not heard much about families today, but I want the House to reflect on what it means to be in poverty in the opening years of the 21st century. The Family Welfare Association has calculated that, once household costs and bills are paid, the poorest families have £3 a day on which to feed and clothe every child and provide them with the sort of extras that families always want to provide. The Bill is central to any attempt to improve that situation.
Poverty is seamless in its impact. It feels the same whether one is in or out of work. That is why we should have a seamless policy in response. Seamlessness has been elusive; no one knows that better than the noble and learned Lord, Lord Howe of Aberavon. I remember when the Supplementary Benefits Commission was being wound up in 1979, after the failure of negative tax credits. The structure of supplementary benefits was then described as a once-noble strategy that had become surrounded by ramshackle sheds and outhouses that were in danger of bringing it down. We have not made a great deal of progress, but we have responded to some of the things for which the poverty lobby has been asking for a long time.
The strength of the Bill lies in its reliance on evidence and expertise. It is not a technical Bill in the sense that it is incomprehensible. It does not simply re-define the definition of poverty. It deals with some of the historic barriers that keep people in poverty. For years, the poverty lobby begged the Government not only to recognise that all poor families are poor in the same way but to provide a kinder and more responsive system, with simpler assessment and wider access and in which payments are paid to the responsible carer. That will provide greater security and greater dignity.
The noble Lord, Lord Saatchi, had a great deal of fun with evolution and abortion of different forms of credit and their titles. With the best of intentions, there has come greater complexity. Family lives are extremely complicated. There are four separate routes for child payments: universal child benefit; child additions attached to income support and JSA for people out of work; child credits attached to working families' tax credit; and a children's tax credit for people in work. Yes, there are four different credits each applied for separately, each assessed separately, each awarded separately and each award going to make a similar difference in a similar way. The Bill takes a bulldozer to that undergrowth and complexity and it creates a broad highway out of poverty.
The crucial test will be take up. I believe that it will be increased for the following reasons. First, the separation of work credit and child support is long
overdue. It puts an equal value and dignity on both. One cannot underestimate the value of symbolism in social security. It is extremely important for people to be treated with dignity.In terms of the child tax credit, we are moving towards a new definition of "universalism". The great strength of child benefit has been that it goes to every family. It creates a contract of interest in the welfare of the child. Creating a single tax credit with the same level of credit for all children signals the value and the needs of all children. I do not believe that that is a reflection of dependency and I greatly doubt whether many families do so. The decision to uprate the child elements of the child tax credit in line with earnings extends that contract. It means that all families now have a vital share in a growing economy.
Supporting all families, but giving greater help to those who need it through an inclusive test of income and not a means test, which stigmatised the claimant—and I entirely with what the noble and learned Lord, Lord Howe, said about the means test—will encourage take up.
Secondly, I warmly welcome the decision to pay the child tax credit to the carer. It will usually be the mother. The childcare tax credit will also go to the carer. I do not see anything stealthy about that. I can think of systems which are less stealthy than the mother caring for the child and receiving the benefit. I am sorry that the noble Baroness, Lady Castle, is not in her place today because she fought and won that battle in 1975 and she would have some warm words to say about the way the change is being made. It will simplify and encourage take up.
Moreover, unlike the other place which struggled with a fog of assumptions—not knowing how the benefits will kick in and what will be the inter-relationship between them—we now know how generous the Chancellor has been. A child credit of £54.25 a week for the first child in families with incomes of less than £13,000 will have a real impact on the family food and clothing bill. And there is something else to rejoice about: the disregard on maintenance has already been shown to have a positive effect on work incentives for mothers eligible for working families' tax credit and the disabled person's tax credit. It goes along with common sense and flexibility, which I believe is written through the paper that accompanied the Budget, and with the equally welcome decision to fence off the capital cliff edge so that people are not suddenly shoved over the edge when they hit the capital barriers.
I turn to the decision to pay credits in retrospect on an annual basis. I, too, believe that that will bring enormous benefits to family management. Trying to stretch a budget across a week is an art form. Trying to stretch it across an unpredictable year is a fine art which few families can manage. Moving on to an annual entitlement will reduce the burdens on families, the crippling unpredictability of income and the burden on the awarding agencies.
That change, above all, is at the heart of the Bill. It will require immense and scrupulous care in terms of the transition process. It will mean providing quality of and access to information and extensive training of new staff. It will mean that we must have the best IT system. It is extremely difficult for any social security system to strike the right balance between simplifying the system and taking into account the chaotic circumstances of family life.
What cheers me is that in the papers I have seen there is a clear determination to minimise the risk at point of transition. The Government have got it about right. Disregarding small losses of income while allowing for rises of less than £2,500 is a good and sensible way to act. It is practical. I am also pleased to see that the preferred method of dealing with overpayments will not be to issue one-off demands. We do not want to fall into the trap which the Australians fell into.
However, there is a major challenge to families in collecting information in new ways. They will need help to do that. It means a change of habit and culture. That was explored at some length in Committee in another place. There is no doubt that it will be much more successfully managed if we do what the Minister in the other place suggested; that is, recognise what real life is all about. Families will need contact and support from groups which are used to providing information and help. The transition process is crucial. I am rather sceptical about the emphasis placed on on-line applications and would welcome the Minister's views on that and on the process of publicising and supporting the transition.
In conclusion, I want briefly to comment on two aspects of the Bill. I am delighted that by separating out work credits from child credits it is finally possible to help students and student nurses with their childcare costs. I notice that the General Secretary of the RCN warmly welcomed that. She said that nurses are being forced out of nursing because they cannot afford their childcare costs. What a time for nurses to be forced out of a profession that is longing to recruit more nurses and when we have so many mature students entering higher education. We need their skills and we must provide such help.
Secondly, I am delighted that people in work and on low incomes but without children will be brought into the tax credit system, especially young people. The uncertainty and difficulty in getting a first job, acquiring crucial skills and being unable to obtain support on very low incomes is a major issue. Providing an extra £30 a week for couples earning less than £10,000 will make a huge difference.
Finally, I have some questions for the Minister on issues opened up by the Bill. Like the noble Lord, Lord Rix, I greatly welcome the decision to extend childcare tax relief to families using their own homes. I wonder whether this is the time to grasp the nettle and whether the Minister, as only she can, will try to charm the Chancellor into making this the first move in provision for all informal childcare. That will have a profound effect on lone parents in work.
To extend the metaphor, the other nettle is the disproportionate number of large families in poverty. Is it not time to see whether something more sensible can be done for those people and their families? Finally, given the reliance of families in poverty upon passported benefits—a question that was left hanging in the other place—has progress been made on the attachment mechanism to the new important benefits?
I think that we have a historic Bill which raises the prospect of achieving what everyone wants to see; that is, a reduction in the number of families living in poverty and a more effective and appropriate system for doing that. The process is the challenge and it needs to match the principle. But, given the consultation and the way in which it has worked so far, I am more confident that it can be achieved.
4.28 p.m.
Lord Freeman: My Lords, it is a pleasure to follow the noble Baroness, Lady Andrews, because I find myself in agreement with a great deal of what she said. She has tremendous experience in the field. One of the key points she made at the outset of her speech was the value in and the need for a kinder and more responsive system. Members on these Benches would agree with the noble Baroness that it is not a question of why; it is a question of whether: whether what is proposed will deliver what the Government correctly and legitimately want in terms of improved care for those on low incomes but in work and those who have children.
I declare an interest as an adviser to PricewaterhouseCoopers, part of the wider accounting profession which each year has to deal with what seems to be a geometric progression in tax legislation. It is rather like an Irish tide with a strong westerly gale; one is always hoping the tide will recede but somehow it never does. I thank the Minister for her courtesy in providing a briefing before Second Reading—something devoutly to be wished would apply to other departments. It is greatly helpful to debate on a common platform of facts.
The Minister asked noble Lords, particularly Back-Benchers, to write to her. I shall do so, in the hope that her answers to specific points will illuminate the Committee stage.
My noble friend Lady Noakes and others have already made clear that the Government have embarked on a process of drawing together tax and part of the social benefits administration and cash flows, which are increasingly to be managed by the Inland Revenue. We ought to be clear that we are not entering or re-entering—as the noble Baroness, Lady Andrews, implied—an integration of the tax and benefit systems, to replicate previous experiments with a positive and negative tax system. That is not being offered. However, it does beg the question of what further tax credits are planned. What other aspects of the social benefits system are to be marshalled together with the tax system? There are fundamental differences between them still.
The noble Baroness, Lady Noakes, correctly said that the income tax system is based on a retrospective assessment of people's income that is annually assessed. PAYE is a clever mechanism for extracting payments on account but fundamentally the system is retrospective. The social benefits system of which tax credits are a part is a prospective application of assistance. It can be adjusted during the year, but many of us involved in the practical administration are delighted that we are dealing with the provision of tax credits on the basis of an annual estimate of income. It is either retrospective in certain cases, when adjustment comes within the year, or is an estimate of income for payment during the course of the year.
My noble and learned friend Lord Howe and others pointed out an even more fundamental difference—that since 1990, thank heaven, tax is based on individual assessment. My noble and learned friend's seminal pamphlet published by the Bow Group in 1968 almost doubled overnight the number of young, thrusting professional women joining the Bow Group. His was an important seminal thought that eventually became law in 1990.
A number of anomalies are created because the tax credits system is based on the family unit. When two systems are run in parallel, a number of complications arise. I will not deal with the vexed problem of varying marginal rates of withdrawal of benefit or increases in tax—which is inevitable when two systems are run in parallel.
I want briefly to flag up some of the administrative complications that have, under similar reforms in the past, led to lower take-up. Heavens above! A 62 per cent take-up for the working families' tax credit is no credit at all. Three areas need to be addressed early. I have always thought it anomalous that your Lordships' House and another place examine the principles of legislation but do not seem to devote the same time to looking at how the processes are introduced and the results. We have Select Committees but there are lessons to be learnt from other legislatures—particularly across the Atlantic.
The areas I want to touch on are application forms; the sufficiency of the resources devoted to the reforms by the Inland Revenue; and the transitional arrangements and start date. When the Minister winds up, perhaps she will say whether draft regulations can be made available before the Committee stage. I dare say that is possible. It would immensely assist the progress of the Bill through your Lordships' House if we can see the entire shape of the reforms. Tribute is due to the Minister's Department and to the Inland Revenue on a great improvement in the quality of the consultations on the introduction of the two new tax credits with lobby groups, the accountancy profession and employers—compared with the experience of 1998, 1999 and 2000 in relation to the working families' tax credit.
First, application forms must be easily understandable. The noble Baroness, Lady Andrews, rightly referred to families who are literally in a state of chaos. It is difficult for them to understand forms as
easily as your Lordships. Clear English is needed for the regulations, leaflets, forms, code of practice, and the setting out of claimants' rights and obligations. The Bill is already a step forward. I am sure that my noble and learned friend agrees that the text is much clearer than in the past, which goes for both administrations.Secondly, I am suspicious of the resources being devoted by the Inland Revenue. There will need to be excellent linkage between the Inland Revenue, job centres, local authorities and pension schemes. I am doubtful that the software, hardware or procedures are in place to ensure that that happens. Citizens ought to be offered so-called "better off" calculations. If someone claims for either of the two tax credits in the Bill, will they be better off? I refer to the perverse influence of the marginal rates in certain cases. Personal counselling and help should be provided to applicants. We should learn by experience. The Government should not be too proud to return the legislation to Parliament after three, six or nine months to amend and simplify the procedures.
I share the scepticism expressed by my noble friend Lady Noakes about IT. Sophisticated IT will be needed. I give your Lordships a specific example. When someone comes out of work, he or she will have to apply for income support. The Inland Revenue needs to get that information automatically transferred, probably electronically, so that child tax credit can be changed. There must be a linkage also to local authorities, in the provision of housing and council tax benefits. The mind boggles at the complications.
Finally, 6 million households will move to the new tax credits system by and on 7th April 2003. While your Lordships may welcome the fact that there is to be no overlap between the payment of working families tax credit and working tax credit for employers—that would be a complication—unless the administrative complexities are mastered and we can be assured of a more successful take-up rate, I hope that the Government will consider postponing the implementation of the reforms until the system is working correctly. As we draw closer to the target date currently set, I trust that the Minister will provide the House with information on how successful plans that have been laid for some months now have proved in implementing the new measures.
4.39 p.m.
Lord Haskel: My Lords, I have little expertise in this area, so your Lordships will be pleased to hear that I do not have a lot to say. I particularly wanted to speak in this Second Reading debate because the Bill has something that is rarely seen in legislation that comes before your Lordships. The Bill has vision. It seeks to continue the work of creating a fairer society by helping people to climb out of poverty and get into work. And few would argue with that vision. It even has the support of the noble Lord, Lord Saatchi.
When this Bill was debated in another place, MPs lacked the numbers and tapers without which the Bill was perhaps somewhat academic, but the principles were absolutely clear. Now that we have the numbers after last week's Budget, we can see that guaranteed minimum incomes really will enable people and families to do what the Bill will encourage them to do. I am most grateful to my noble friend the Minister for giving us the numbers in such great detail. Perhaps they were a little indigestible, but none the less they will make interesting reading.
As my noble friend Lady Hollis explained, the whole purpose of tax credits is to eliminate the old poverty and employment trap, where it did not pay people on benefits to move into low-paid work. We have already seen that tax credits do this. My noble friend reminded us that, in a way, this Bill is a development and refinement of what is already in place, but with one important new element. The child tax credit and the working tax credit are entirely separate.
The child tax credit supports families with children, whether the parents are in or out of work. The working tax credit supports low-paid families, whether or not they have children. Like my noble friend Lady Andrews, I think that this is yet another move towards greater freedom and less dependence rather than more dependence, as suggested by the noble Lord, Lord Saatchi.
The children's tax credit and the working tax credit top up the incomes of families and the working poor. In effect, the bottom 40 per cent are gainers while, to a varying degree, the top 60 per cent are losers. Yes, this is an element of redistribution, but it should not be taken in isolation from the education and skills training schemes designed to make the working poor into the working better off, and to help employers fill those skilled vacancies, which seem to be blocking our economic growth.
It is conceivable that the working tax credit on its own would simply subsidise low pay and gain nothing for the economy but, taken together with the minimum wage, this legislation will provide a pathway to work and a whole culture of moving into higher skills and higher pay. Furthermore, it does so in a dignified and unpatronising way.
I make that point because some noble Lords, including the noble Baroness, Lady Noakes, have complained that the working tax credit is an additional burden on employers. Most businessmen are not whingers; they look at these things as a whole. Certainly the burden is minimised by allowances made to small companies for clerical work and annual assessments to reduce the numbers of changes. But businessmen know, too, that they can benefit. Recent surveys have shown that the biggest barrier to growth is no longer the strength of the pound, but the skills shortage. By participating in this whole group of schemes, businesses have the opportunity of attracting new employees who perhaps are not working, and turning them into valuable and skilled members of staff, with all the costs of doing that heavily subsidised by the Government. Surely that is worth a bit of extra administration.
This initiative may well have come at the right time. I think that many businessmen do care. Businesses realise that they need to go further than simply showing social responsibility. Corporate philanthropy is not enough. Now, most companies think that there should be some social purpose to what they do. What more important social purpose could they fulfil than by turning the unskilled poor into the skilled better off? So all businessmen do not just complain about costs; they take a much broader and far more entrepreneurial view. I wish that noble Lords would give them the benefit of that doubt.
The working tax credit will also include an element for the costs of childcare, either in or out of the home. This, too, will help businesses, as it will help low-paid parents who have to work irregular or unsocial hours and so cannot use nurseries or childminders. The credit will be paid directly to the main carer to make it more likely that the money will be spent on the children, which I think is very good.
However, there is one matter in the legislation which does appear to me to be regressive. The noble and learned Lord, Lord Howe, referred to this point. To receive the working tax credit or the child credit, a claim form has to be completed. The income used to calculate the entitlement is the total family income, not the income of an individual. Of course the noble and learned Lord, Lord Howe, pointed out that joint taxation is not new. Only 10 years ago, tax was based on the joint income of all married couples unless one specifically opted out. However, the tax system has been moving steadily in the direction of independent taxation for spouses. Family tax credits seem to reverse that trend and I am not sure that that is something which will be helpful to family relationships. In the modern world, some spouses want to keep their tax affairs separate and private. A way should be found to facilitate that.
In spite of that small point, I welcome the Bill. I welcome it because it is unashamedly progressive and an important part of the overall scheme to move yet more families and children out of poverty. However, it is also a step further along the process of remoulding society into one where fairness and enterprise sit together.
4.47 p.m.
Lord Northbrook: My Lords, one of the Chancellor's major ideas since 1997 has been the integration of tax and benefits. The result of that philosophy has been a whirlwind of activity which has enormously complicated the system of welfare benefits. Noble Lords should cast their minds back to 1997 when, in the area we are discussing, we had the simple concepts of the married couple's allowance, family credit and the disability working allowance. Since then, it has been "all change".
At this point in my remarks I was going to run through all the changes to the regime that have taken place since 1997, but as my noble friend Lord Saatchi has done that already, I shall not bore the House. Instead, like other speakers, I should like to emphasise
the complexity of the Government's welfare payments changes since 1997. Since October 1999, the Government have introduced five new tax credits for families, scrapped four of them, and then introduced two further new ones for April 2003. As stated by my noble friend Lord Saatchi, that represents a new tax credit for families every six months.I should also like to ask the Minister how many more members of staff will be required by the Inland Revenue to administer the new credits. I ask that question in the light of the comment made by my noble friend Lord Freeman to the effect that 6 million new families will be eligible to claim them. I should also like to emphasise the burden to be put on business, as has been done by my noble friend Lady Noakes, in administering the new tax credits.
Like my noble and learned friend Lord Howe of Aberavon, I should like to ask the Minister whether it would not be better to raise tax thresholds than to increase the benefits population. I agree with my noble friend Lady Noakes that to conduct taxation by way of regulation is a bad trend.
I want to concentrate on three areas of the Bill. First, the basis of claim; secondly, concerns about fraud and, thirdly, the treatment in government accounts. First, looking at the basis of claim, as other speakers have noted, the record of WTFC is not encouraging as a pointer to the future. According to the Chartered Institute of Taxation, only one in 10 tax inspectors could fill in the relevant application form successfully . The introduction of the new tax credits will serve only to highlight the already existing complexity. The Institute of Fiscal Studies has the following to say about the new system:
- "Claimants should find the new system very different from existing means-tested benefits, with the Government hoping that an annual system will be easier to understand and administer, and less obtrusive for claimants. But the conflicting aim of targeting the credits effectively has forced the Government to compromise on simplicity and predictability for families whose composition or income changes significantly during a year".
During its investigation of the new child tax credit the Social Security Committee stated:
- "There is still a considerable way to go to create a tax credit and benefit system which is easy to understand and to use from the recipient's perspective".
Under the working families' tax credit only 1.3 million out of 1.5 million have claimed it in the two years since it came into being. With the child tax credit and working tax credit, the complexity of the means test will mean that fewer people will take it up. The new credits will mean that the proportion of families in receipt of means-tested benefits will grow, as has been stated by other speakers, from 24 per cent in 1998-99 to 38 per cent in 2003-04. The Prime Minister himself has highlighted the problems of means testing. In 1998 he said on "Breakfast with Frost":
- "There are problems if you move to too much means testing as you can see with pensioners who do not take up income support".
Moving on to concerns about fraud, when the working families' tax credit and the disabled person's tax credit were introduced, questions were asked about the scope that they presented for fraudulent claims. The Social Security Select Committee stated in 1999 concern that the potential for fraud in the tax credit system could increase if priority was placed on prompt payment rather than on rigorous checking of eligibility. Frank Field also highlighted the scope for fraud in 1998.
Other tax credit schemes abroad have had the problem of fraud. The working income supplement in Canada saw such problems of fraud that the department is now moving back to a benefits-based system. The US-based earned income tax credit—the EITC system—also saw extensive, fraudulent over-claiming.
The Government have determined that the tax credits are administered through the payroll and therefore they are not subject to the Social Security Fraud Act 2001, which aims to reduce the costs of welfare fraud. A letter from Dawn Primarolo, placed in the House of Commons Library in April 2001, stated that there had been approximately 29,000 WFTC and DPTC investigations. In the region of 300 penalties were imposed. I ask the Minister how that compares with the family credit regime and how much has been recovered by way of over-payment and penalties.
One problem of the current system which has been highlighted is where people have booked places with existing childcare providers. Once they have received sufficient proof of the cost of the childcare, they cut all contact with the childcare provider and pocket the WFTC cash for the next six months. That example is quoted by David Willets and Nicholas Hillman in their booklet Tax Credits-Do They Add Up? It seems strange that the money cannot be paid direct to the childcare provider.
Furthermore, under the new system there will be the further weakness that claimants will not have to provide the Inland Revenue with written confirmation of the childcare costs as they currently have to do, as I understand it, and neither will they have to provide documentary proof of their childcare costs or earnings in contrast to the current WFTC system.
The complexity of the new regime will make it easier for fraud to enter it. Claimants will need to provide detailed information on changes to their annual
income, on their average hours of work and on their childcare costs, which could increase the scope for fraud.Finally, I wish to move on to discuss the treatment of the tax credits in the government accounts. As mentioned by other speakers, in the past family credit was counted as part of social security spending, but now the Treasury counts its current replacement, the WFTC, as a £6 billion tax cut. If all benefits were replaced with tax credits in that way, all benefit expenditure would miraculously disappear from the government accounts. I ask the Minister whether there is a possibility that the new benefits could be categorised as government spending by an amendment to the Bill which would make their overall costs much clearer?
In summary, I have a mixed view of the Bill. I welcome the fact that there are no capital limits, that the tax credit is extended to support about 100,000 families who are currently excluded, including students and student nurses, and that it will support families with young children who are in full-time education up to the age of 19. I am pleased also to note that the child credit will end the unfair treatment of single-earner families.
However, my approval is balanced by criticism, first, of the expansion of means testing, which encourages further dependency and, secondly, of the potential of fraud due to the complexity of the new benefits. My final criticism is of the treatment in the government accounts of the benefit as a tax cut rather than a benefit. I am sure that we shall return to these issues at Committee stage.
4.56 p.m.
Baroness Byford: My Lords, I join with other noble Lords and thank the Minister for setting out the principles of this Bill drawing together the tax and benefits system. If I understand correctly, the main purpose of this Bill is to make up the income of anyone entitled to a payment under it to a higher level than would otherwise be the case. Until the Budget I had thought that that entitlement would accrue mainly to the financially disadvantaged in our society. Indeed, I follow other noble Lords who have reflected that only in fact 10 per cent of families will not qualify for some form of tax credit, which should be of concern to us all.
Those who will receive payment through the good offices of an employer will presumably receive the credit in the same fashion as their pay; in other words, if through bank automated clearing services, then through that system; if by cheque, then by cheque; and if in cash, then in cash. The Bill does not actually specify that and I am surprised that it does not.
I am also surprised that there does not appear to be any form of compensation for the extra work and the bureaucratic hassle that employers will doubtless have to endure in the running of this negative tax collection system for the Government. Will the Minister assure us that employer responsibility will not include any involvement in sorting out problems between employees and the Inland Revenue?
How will the credit be paid to those who do not have handy employers to bear the onus? It will be due to the self-employed, those who have more than one employment and those who have a series of part-time jobs who come in when needed, and those who are temporarily out of work. Will the Minister explain the mechanisms envisaged to ensure that this time the credits are claimed and paid?
Will she also comment on the progress in respect of the doubts expressed by the social security committee in its second report, when it queried whether the IT and the administrative systems would be ready for 2003? Is Alistair Darling's recent announcement of the delay in paying the child tax credit related to these doubts and an acknowledgement that the committee was in fact right and it will not be ready?
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