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Earl Russell: My Lords, they would probably mark them rather more harshly than I would.

Lord Saatchi: My Lords, that is possible.

The letter arrives at a specific figure. It says that when the whole process is complete, employers will save 11 million. It is very specific—that is the amount of the saving to which it refers. This was doubly interesting, and I was curious to see how the Government could have arrived at such a firm figure.

In order to demonstrate how the impact assessment is carried out, perhaps I may subject your Lordships to an IQ test of a sort. I promise that it is only a slight paraphrase of the Minister's letter. It goes like this: if it takes one man between 45 minutes and an hour to complete an earnings inquiry form, and on average 35 per cent of these forms are directed to small firms, at a cost of 20 an hour, and 65 per cent to large firms, at a cost of 10 an hour, removing the need for these inquiries would save employers between X million and Y million a year, what are X and Y?

Or try this: assuming that around 1 million WFTC/DPTC recipients who are paid by their employers renew their tax credit award each year, and assuming that the move from a six-month award to a 12-month award will eliminate around half of all renewals; and assuming that removing the need to stop payments in advance of a renewal will halve the time taken by an employer to stop and then re-start an award, what will be the cost saving for the remaining 500,000 renewals?

Or take this one: if around 35 per cent of tax credit recipients paid by their employer work for small or medium-sized businesses, and to stop or start a tax credit manually involves around 30 minutes' work by a proprietor or adviser, at a cost of 20 an hour; and if in large employers, with more sophisticated systems, a stop or start is likely to take 30 minutes for a payroll operator at 10 an hour; then by how much will reducing the need for stops and starts decrease employer costs? After seeing the third letter, I thought better of dropping that amendment. I thought that it would be better to let it stand.

In Committee, the Minister confessed that she was baffled by the persistence of our inquiries about costs to small business.

6.15 p.m.

Baroness Hollis of Heigham: My Lords, I did not say that I was baffled about the cost to small employers. I was baffled about the concerns about accountancy, "IR" in capitals, "ir" in lower case letters, and so on. It was entirely proper and I was glad to have the opportunity to reply to the letter from the noble Lord, Lord Northbrook, explaining not only what government policy had done for small and medium-sized enterprises more generally, but in particular how

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we came to a figure of 11 million. I did not want to be accused of plucking some figure from the air. It was built up by quite detailed analysis: we give the assumptions on which it is based, arrive at the calculations and, therefore, give the noble Lord the opportunity to scrutinise this in the way that he is doing.

Lord Saatchi: My Lords, the noble Baroness may remember the slightly chilling phrase that she used to deal with the difficulties that we pointed out in relation to the administration of tax credits by firms. She said:

    "all they have to do is to pay out what the tax credit office tells them to pay".—[Official Report, 16/5/02; col. CWH 36.]

The curiosity is that employers themselves do not see it as quite so simple.

I should like to suggest a kinder approach. Perhaps I may remain in the idiom of the IQ test as I have started in that vein. Let us say that we accept all the assumptions that I have described as accurate, and that we accept that the Government carry out their own assessment of their own regulations. Let us say further that we accept a figure of 11 million to be the saving. The fact that it is a saving means that, before there is saving, the costs to employers are X. So the present cost to employers of tax credits is X- minus 11 million. I have no idea what X is. I have never seen the figure published. I shall willingly sit down if the noble Baroness can say what X is. In the absence of knowledge—

Lord McIntosh of Haringey: My Lords, it is about 100 million. There are ways of calculating it.

Lord Saatchi: So, my Lords, let us say that the scheme is costing the employers 90 million—which explains why what on the surface appears to be the merit of the saving is not seen by the employers as quite the benefaction that it might otherwise be. It is only a reduction in a high cost, rather than an actual reduction in their total costs.

Having worked out that the net cost to business of the Government's involvement of companies in administering social services is 90 million, the simple proposal in the amendment is that the Government, having calculated the figure, should give it back to employers to compensate them for that sum. I beg to move.

Earl Russell: My Lords, we on these Benches are prepared to support this amendment. Governments for many centuries have been addicted to farming out their administrative work to private individuals and private bodies. Perhaps I may take one example, about which the noble Baroness may feel as I do. In 1517, the Evil May Day riots took place in London—the nearest that 16th century London came to race riots. Cardinal Wolsey drafted a proclamation commanding all husbands to keep their wives within their houses—as agents of the King, as if they were special constables. This obviously is a way by which the state can save money. When states are in the process of programmes of economy, they tend to find this sort of thing very

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tempting. One sees it, for example, in the part that has been given to British Airways in the process of immigration control. It can be very expensive to the private individual or private body concerned. It is a way in which the state can shovel off its costs while getting all the benefit of having everything done its own way.

There is a case for saying that if other bodies are to do the Government's administrative work, they should be paid as if they were in government service. That principle has once been conceded in this House—on the Education (Student Loans) Act 1990. The universities have been very appreciative of that—and that includes me. In a lot of cases, they would have been left with a choice between two people running a loans office or one lecturer who might have to be dismissed to raise the money to pay for it, plus a number of books not bought for the library. Those are not the choices that one likes to have delegated to one.

I have read the letter to the noble Lord, Lord Northbrook, and I appreciate that the Government have in many ways tried to soften the blow. They have tried to ease the burden on employers where they can. However, the basic principle remains that if you get people to do your dirty work for you, you pay them for it. That is a good principle and it is on that ground that we support the amendment.

Lord McIntosh of Haringey: My Lords, I do not think that the House would appreciate it if I spent a great deal of time going over the intelligence test arguments. My only comment about the letter to the noble Lord, Lord Northbrook, is that when the noble Lord, Lord Saatchi, read out the assumptions and went on to ask what the conclusion would be, he failed to read out the essential assumptions on, for example, the number of earnings inquiries that there might be. He gave the House only half the evidence. If he had read the whole of the assumptions in the letter, mathematically he would have come to the conclusions that we have come to. I shall not make any more point of that.

However, I shall make more point of the substantive issues in the letter to the noble Lord, Lord Northbrook, because we ought to appreciate the changes that have been made to the system that has been in operation for the past two years. They are described as minimal, but they are not. I do not expect the London Chamber of Commerce to understand that because the question has not been put before its members, who are describing the situation that is being reformed by the Bill.

There are four points. First, claimants will not routinely have to ask their employers to verify their earnings. Tax credit awards will be based initially on annual income for the previous year. People will have the information necessary to make a claim on their pay slip, their P60 or their self-assessment tax return. Employers have had to be involved in that and will no longer have to be involved in it.

Secondly, if an employee who is receiving working tax credit leaves, the employer will simply stop paying the tax credit. He does not have to complete a

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certificate of payments, as now. Under the present system, entitlement to WFTC and DPTC fixed awards continues for six months even if the recipient stops working. If the employee remains entitled to working tax credit because he has another job, he—not the employer—will be responsible for telling the Revenue about the change of employer.

Thirdly, because the new tax credits will be awarded on an annual basis, there will no longer be six-monthly stops and starts, which are a troublesome feature of the current system.

Fourthly, the application procedure for employers who need funding will be greatly simplified. Employers will apply at the beginning of each tax year and the revenue system will adjust the funding amounts paid to an employer if there is a change in-year to the amount of tax credit that the employer has to pay.

On the technical side of the arguments, I am confident that the Bill makes things significantly easier for employers and no additional burden is imposed. However, it is much more important that we understand the principle behind this. The principle is not—as the noble Earl, Lord Russell, said—getting other people to do the dirty work. As I have said, we have been committed to minimising extra work for employers. The fundamental argument is more basic. The arguments against paying compensation are the same now as they were when we debated the issue in relation to the Tax Credits Act 1999. The system has never provided for a direct subsidy or compensation to employers who fulfil their obligations in relation to tax. Employers are not reimbursed for operating the PAYE system. That is the point that I want to make to the noble Earl, Lord Russell, in particular, as he unwisely expressed his support for the amendment without hearing the arguments. That has been the case since PAYE came into effect 40 or more years ago. I have never heard any objection to that from the Liberal Party, the Alliance, the Liberal Democrats or whatever they have called themselves at the time.

There has been a cash-flow benefit to employers with the PAYE system all the time. Any employer, as I was, who had a PAYE system collected the money from employees long before they paid it out to the Revenue. That is the significant point that has to be made.

In this case, there is no demand on the cash flow of employers. Their cash-flow benefit is marginally reduced, but there is no additional burden. Under the system proposed in the Bill, employers are not expected to fund the tax credit payments, even temporarily, out of their own resources.

Apart from the objection in principle to paying compensation to employers—in other words, to introducing a new principle of compensation on something that has been accepted by employers over a period—the amendment raises tricky practical questions. Paying tax credit with pay is closely linked to other employer procedures in connection with payroll and the PAYE system generally. Separating

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out the costs associated with tax credits from employers' other operating costs would be extremely difficult and time-consuming and would almost certainly add to employers' administration costs. It would be virtually impossible for the Revenue to check on the validity of the costs claimed by employers, given that employers' compliance costs will vary according to the payroll system used and the general efficiency of individual employers. The amendment could well mean more bureaucracy and red tape for employers rather than less.

I have said that any costs to employers of paying tax credit will be kept to a minimum and I have explained exactly how. Those costs must be seen in the context of the many measures that the Government have introduced to help businesses. I shall not repeat them because they were all included in the first letter to the noble Lord, Lord Saatchi, on the basis of which he almost decided not to move the amendment. The fundamental principle remains that the Bill refines and simplifies rather than complicating any possible burden to employers. We have been entirely open about the costs to employers of the existing system and the extent of the savings that are made by the Bill.

Much more fundamentally, it is in all our interests that tax credits should be seen as making work pay and that they should be paid through employers. We shall come to that argument on the next amendment. It is also important that we should maintain the principle that has stood in our tax system for the past 40 years or more, that it is legitimate when adopting the most effective and economical system of collecting tax—which is through pay-as-you-earn—not to pay specific compensation to employers.

6.30 p.m.

Lord Saatchi: My Lords, I am most grateful to the Minister for that reply. I had the pleasure this morning of watching the first 20 minutes of the Prime Minister's first press conference. All the questions that I was able to see concerned the issue of spin and trust. We have had some stunning revelations in the course of our consideration of this Bill. I believe that that is a great tribute to your Lordships' House. We have had, for example, the first full explanation of the treatment of tax credits in the Red Book, and confirmation that the previously inappropriate treatment of tax credits, which I think Ministers have acknowledged, will be changed to bring it into line with normal accounting standards in OECD countries.

There were further revelations. We learned first that 90 per cent of the total amount of tax credits are not in fact tax credits but paid effectively as benefits. In other words, they are not reductions of one's tax liability. I do not think that anyone knew that until this House considered the Bill. The second amazing revelation was that the total cost of tax credits is now 15 billion annually. That massive figure was unknown to the body of economists and others who closely follow these matters. The third figure, which we have heard today for the first time, is that the scheme's real cost is 89 million annually. That figure at last finally clarifies

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why employers have complained and these Benches have taken up their cause, particularly the cause of small businesses.

The last thing that Government Front-Benchers want is advice from our Front Benches. However, I do not understand why the Government do not wish to sing the Bill's merits from the rooftops. Thanks to your Lordships' House, the Government now have another opportunity to produce an annual report in which all the figures I mentioned can be brought together, allowing everyone to see in true light the benefits of this Bill, in which the noble Baroness, Lady Hollis, believes passionately. I am truly puzzled by why the Government would want these figures to emerge as the result of pressure from our Benches rather than as something in which they take a certain pride. Nevertheless, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 17 not moved.]

Clause 40 [Exercise of right of appeal]:

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