HC Deb 19 May 1960 vol 623 cc1597-628
Mr. John Howard (Southampton, Test)

I beg to move, in page 10, line 23, after "Act", to insert: other than one who is in non-participating employment".

The Deputy-Chairman (Major Sir William Anstruther-Gray)

With this Amendment can be taken the Amendments to the Third Schedule, in page 67, leave out line 23 and insert: 1. Employed persons over the age of eighteen—

(a) men … … … … 20
(b) women … … … … 15
and in line 23, leave out " 15 " and insert "20".

There can be a vote if required on the second Amendment to the Third Schedule, as well as to the Amendment which has been moved.

Mr. J. Howard

This Amendment, and others to Clause 17, were drafted by my hon. Friend the Member for Eastleigh (Mr. D. Price), but since, in the words of a popular number from "My Fair Lady", he gets "married in the morning"—I am sure that the Committee will not mind his being absent tonight. He has, therefore, passed that result of his. researches on me.

I refrain from asking my right hon. Friend to accept a subsequent Amendment to delete Clause 17 and to present the deleted Clause to my hon. Friend the Member for Eastleigh as a wedding present. Instead, I will refer to the arguments put forward in favour of eliminating something which we consider to be an unnecessary piece of legislation.

The Clause is regarded as unnecessary because it is a redistribution of income. It gives all taxpayers the same allowance, irrespective of their individual insurance contributions or their own taxable incomes. The contributions made to the graduated scheme are arranged to benefit the lower paid contributors at the expense of the higher paid ones. I am not quarrelling with that, but, in my view, it is inequitable as between one taxpayer and another to reinforce this initial inequity by so arranging the flat tax allowance that a lower paid contributor receives an allowance in excess of his contributions and the higher-paid contributor receives an allowance which is less than his contributions.

The argument advanced by my right hon. Friend in favour of this Clause was that the administrative difficulties in giving the appropriate allowances in coding for those participating in the graduated scheme prevented the normal procedure being followed. I do not accept this argument. At present, there are a large number of companies which operate superannuation schemes which, under the provisions of Section 379 of the Income Tax Act, 1952, are approved schemes. The Inland Revenue is familiar with the details of these various schemes, and automatically makes the appropriate allowances in coding for P.A.Y.E. In effect, therefore, to delete Clause 17 would be to preserve the status quo. The law as it stands is perfectly adequate to cover the administrative problems arising out of the institution of a national graduated scheme imposed on top of a flat-rate scheme.

If I may return to Section 379 of the Income Tax Act, 1952, and particularly subsection (2), I think that it provides the machinery which is required to deal with this new scheme.

Sir E. Boyle

If my hon. Friend will allow me—I am trying to be helpful to the Committee—may I say that this Amendment raises the question whether there should be flat rates and what the amounts should be. It seems to me that the group of Amendments we are now discussing to a considerable extent overlap the Question "That the Clause stand part of the Bill". Therefore, Sir William, I wonder whether, for the convenience of the Committee, we may have the main debate on these Amendments, and then, if hon. Members in all parts of the Committee are content, there should be only a short debate on the Question "That the Clause stand part of the Bill."

The Deputy-Chairman

I think that that would be for the convenience of the Committee.

Mr. Howard

I will say nothing more about the deletion of the Clause, and I made reference to its deletion only because that explains why this Amendment was put down.

The purpose of the Amendment is to put before the Committee a saver in case we are unable to delete the Clause by the later Amendment. We can see no justification for an increased allowance for those contracting out of the scheme. We should prefer them to be dealt with by existing legislation. Therefore, the effect of the Amendment would be to take out from the provisions of the Clause those who are in non-participating employment, that is, those who have contracted out of the graduated scheme. If that Amendment were accepted, clearly some further legislation would have to be introduced to cover those people who had contracted out and were making contributions to a private scheme.

If hon. Members refer to the Amendment to the Third Schedule, they will see that we have put down certain modifications to the allowances for contributions under the scheme in case our Amendment to delete the Clause is unsuccessful. The Committee will see that we have sought to make the allowances for men and women over the age of 18 £20 and £15 respectively. If we accept the principle in Clause 17—and I hope that I have made it clear that I do not accept it—the scale of allowances in the Schedule is wrong mathematically. According to the Ministry of Labour Gazette, in February, 1960, the average earnings for male adult manual workers in October, 1959, were £13 10s. 9d. a week. If we apply an arithmetical calculation to those figures we see that the allowance which should be granted under Clause 17 for men should be £19 and not £15 as in the Schedule. If we make an allowance for all salaried staff, whose average earnings are higher than £13 10s. 9d., we arrive at a figure of £20, which I do not think is excessive.

Under the Clause female workers are to receive the same allowance as male workers. Under existing legislation females receive an allowance of £11 whereas males receive an allowance of £13. The average earnings of female workers over the age of 18 in October, 1959, was £7 a week. I therefore contend that there should be a differential in the scale of allowances between men and women in recognition of the higher contributions which men make to the graduated scheme. I do not regard the figures in the Amendment as sacrosanct, and if the principle were accepted I should not feel tied to those figures.

Mr. Graham Page (Crosby)

I should like to support my hon. Friend the Member for Southampton, Test (Mr. J. Howard) in both the Amendments which he has put before the Committee. My right hon. Friend the Chancellor justified this Clause on Second Reading by saying that it dealt with graduated contributions. He said: Clause 17 meets the situation which will be created when the graduated contributions begin to be payable … These graduated contributions could not be handled under the pay-as-you-earn procedure without grave risk of the machine breaking down."—[OFFICIAL REPORT, 3rd May, 1960; Vol. 622, c. 891.] But this Clause goes further than dealing with the graduated contributions, because it applies to a contributor of any description and it therefore applies to those who contract out of the scheme. A flat rate is applied throughout, with the result that, if we take the figure in the Schedule of £15, the man who contracts out of the scheme is receiving a gratuitous £2, for he is receiving an allowance of £15 instead of £13.

I cannot see how it can be justified as an application to all and sundry when my right hon. Friend justified it on the basis of the graduated scheme. It is the intention of the Amendment in page 10, line 23, if the flat rate is accepted, to apply it merely to those within the graduated scheme. If we are applying it to them and trying to apply it fairly, it is surely right, as my hon. Friend said, that we should take into consideration the different contributions which the male and female make and try to make some such adjustment as the Amendment suggests. It is an increase to the figure of £20 for the male, leaving the figure of £15 for the female.

I dislike the Clause. I hate the justification of administrative convenience which brings inequality and unfairness amongst taxpayers. However, if the Clause has to be accepted, as at this stage in moving the Amendment one must accept it. we should try to make it as fair and reasonable as possible as between taxpayers.

9.0 p.m.

Mr. Houghton

I am sorry that we cannot support the Amendment moved by the hon. Member for Southampton, Test (Mr. J. Howard) or the remarks of the hon. Member for Crosby (Mr. Graham Page). We doubt whether the standard relief proposed is adequate, but we agree with the general principle of a scale of flat-rate allowances.

This is a very complicated matter indeed. I go further and say that, unless the Committee deals with it realistically, it will be a positive shambles of administration. That is not an exaggeration. It will. I beg the Committee to save millions of taxpayers from the most irritating adjustments of their tax liabilities which will be necesary after the conclu- sion of the tax year, unless we adopt some scheme of standard reliefs of this kind.

Mr. Graham Page rose—

Mr. Houghton

This is so complicated that, if I am put off, I, too, shall get into a muddle.

I must point out to the hon. Member for Southampton, Test that the contribution of the person who is contracted in may be no higher, and indeed can be lower, than the contribution of the person who is contracted out. Therefore, if a higher relief is to be given for all who are contracted in, it may mean that some will get a higher relief for a lower contribution than is given to those contracted out for a higher contribution. That would make unfairness worse confounded.

What is not generally understood in connection with the graduated scheme is that those who are contracted out will continue to pay the existing flat-rate contributions, whereas those who are contracted in will enjoy the benefit of a reduction in the flat-rate contribution upon which will be built the graduated contribution. A man earning £9 a week in a non-participating employment will pay a higher flat-rate contribution for his existing benefits than a man in a participating employment will pay on the same rate of pay in the graduated scheme.

It is an extraordinary situation. It will have to be explained to many millions of puzzled workers in the months ahead. That is why I have tried to learn it myself in readiness. Certain National Insurance benefits were exempted from tax, for administrative reasons. When sickness benefit was excluded from tax liability, the Chancellor of the Exchequer of the day naturally made a corresponding adjustment in the amount of the contribution which should qualify for tax relief. Therefore, not all the contribution qualifies for tax relief. A man now paying £26 a year in contributions receives tax relief on £13. If he is contracted into the new scheme, his flat-rate contribution will be reduced to £21 10s. and he will be given tax relief on £15 under the proposals in the Clause as it stands.

Therefore, for a lower contribution he will get a higher relief. That is inevitable if a system of flat-rate allowances is to be given under the new scheme. The maximum graduated contribution, in all, will be £35 a year, and relief will be given on £15. For a woman, the maximum will be £32 10s., because she enjoys the lower flat-rate contribution, and she, too, will receive relief on £15.

The Committee has to consider whether this rough justice will really make the administration of the scheme practicable from the point of view of both the Inland Revenue and the taxpayer; and, if so, whether it is justified, rather than face the alternative that I have described, which is positively frightening in its dimensions and in its difficulties.

The next question is whether there should be any differentiation. Even if we have a flat-rate allowance, should there be a differentiation between those who are contracted out and those who go into the graduated scheme? Part of the difficulty about that is that in the process of assessment of tax the Inland Revenue will not know whether a person is in the new scheme or is not in it, and as far as I can tell there will be no means of the Inland Revenue being notified in every case of a person being in the new scheme or out of it. If that were to be part of the administration, it would be an additional complication, and an additional administrative burden.

This, perhaps, sounds rather like an Inland Revenue speech, and I am probably saving the Financial Secretary a great deal of trouble. I claim, however, to be rather close to the administrative side of the problem, and I think that it would be remiss of me if I did not give the Committee the benefit of that experience and knowledge in this connection. I do so in quite a disinterested way. I am thinking of what taxpayers will feel if they encounter this business of adjusting their tax liability after they thought it had all been dealt with.

As I said before, The Times newspaper has said that: This monstrosity should be firmly rejected. Nevertheless, I am in favour of more flat-rate allowances for tax relief. I am in favour of rougher justice in tax reliefs, because I believe that it would mean easier administration and would obviate a good deal of marginal difficulty —and quite a lot of marginal avoidance.

If only taxpayers would accept that as a basis for future review of much in our Income Tax code, I am sure that there would be a good deal less discontent with the operation of the tax code at the present time. I am sure that I am right about that, and that taxpayers will come to understand that, not only in this connection but in others, too.

After all, we do it already in connection with matters that we have discussed in previous Clauses. One may have an economical housekeeper or an extravagant one; our dependent relative may be more costly to maintain than the dependent relative of a friend, but there are flat-rate allowances, standard reliefs for given conditions, and we do not inquire into the details of expenditure of the taxpayer. It would be impossible to administer the code on such a basis.

Therefore, rough justice is accepted in the whole scale of personal reliefs at the present time. Why, then, get into a "tiz" when there is any suggestion of flat-rate allowance where there is actual monetary expenditure? The principle is the same, whether the money is spent on a housekeeper or on National Health Insurance contributions, graduated or otherwise.

This, therefore, is right in principle, and I defy The Times or anyone in this Committee to call it a monstrosity. It is the only way that will make sense of the scheme. If the Committee does not accept it, it will be doing a disservice to millions of taxpayers, who will have plenty of other worries in connection with the new scheme, and plenty of difficulties. Let us have their tax reliefs settled when their coding is determined and see them through the year without any further complications.

Sir Spencer Summers (Aylesbury)

I have considerable sympathy with what the hon. Member for Sowerby (Mr. Houghton) referred to as the need to consider administrative convenience. He went on to say that he was in favour of rougher justice. One of the Amendments has behind it the objection to treating men as women. This is rather rougher justice than I am prepared to accept.

The hon. Gentleman argued against the first Amendment on the ground that it was reasonable to treat alike a £9-a-week man who was contracted out and a £9-a-week man who was contracted in. His analogy was surely quite hypothetical because, in fact, nobody will contract out a £9-a-week man because he would suffer as a result. I do not think that that argument can be valid.

Mr. Houghton

In a number of cases the whole vocation is being contracted out. The Civil Service is an example of that. The whole of the permanent Civil Service, irrespective of pay, is being contracted out, and the whole vocation goes, including the £9-a-week man.

Sir S. Summers

If there are any civil servants receiving £9 a week, no doubt the hon. Gentleman will show me where to find them. That is not a very good example in support of the case he puts.

Having regard to the disparity of earnings between men and women and having regard to the disparity between the contributions they will make, I ask my hon. Friend to look very seriously at that aspect of the matter. It does not violate the principle of a flat rate in the sense of treating all people more or less alike, and it would introduce that element of distinction which the facts warrant. I hope my hon. Friend will consider very seriously that particular Amendment.

Mr. McKay

I disagree with the whole principle embodied in the National Insurance Acts relating to tax allowances because of the invidious distinctions it creates between one contributor and another. As regards the £15 and £20, I think that the £20 goes far beyond what is reasonable. The £15 is much more reasonable, taken in conjunction with the financial position postulated.

I understand the reason for tax allowances in the National Insurance Scheme to be this. When a man is paying for a pension, he is paying for something which he does not receive at that time of life. He has to wait for it until he is a very old man. For that reason, there is special tax relief.

I have in the past tried to show the invidious effect of this on the lower-paid man who has bean paying a level rate of contribution because either he has not been paying any tax or only at a very low rate, with consequent inequality in insurance contributions. After all is said and done, this allowance is largely based on the amount of money paid for pension. How can one equate in any way the position between those paying tax in the various bands of taxation between 1s. 9d. and 7s. 9d., or the Surtax payer? It is said that tax reliefs should be related to the amount of tax that one pays and it is also asked how it could be done otherwise.

9.15 p.m.

Let me take the case of a man earning £400 with a £15 adjustment in respect of the payment of contribution. A married man would pay tax on £60 at the 1s. 9d. rate. According to information supplied yesterday, a man paying 1s. 9d. gets tax relief of £1 6s. 3d. in the year. How can it be adjusted so that the man with the lowest wage and taxed to the extent of £5 5s. gets a tax relief approximating in proportion to that which the man who pays 7s. 9d. receives? He is paying for the same purpose. One gets £1 6s. 3d. and the man paying 7s. 9d. gets £5 16s. 3d. tax relief on his National Insurance contribution. The Surtax payer who pays 12s. 3d. in the £ gets a 3s. 6d. tax reduction on his week's contribution.

It is said that the position of the man earning £400 cannot be adjusted because he has a different rate of taxation. It is not necessary that one should work on that basis. Why should the man earning £400 get a tax relief of only £1 6s. 3d.? The man on the 1s. 9d. band pays £5 5s. in taxation. There should be more equity between the position of the man with only £1 6s. 3d. relief and that of the man paying 7s. 9d. who gets £5 16s. 3d. in tax relief. He has paid for the same purpose, but merely because he is in a different band of taxation and the matter is regulated yearly he cannot get a proportionate relief. The £400 per year married man taxed £5 5s. should get £5 5s. tax relief at least when others get more for the same contribution. That is one of the weaknesses of the insurance scheme and the tax reliefs that operate. In the case of the man receiving £15 to £20 a week the position is worse. If we were beginning a national insurance scheme with the knowledge that we have today we would not support a scheme in which these invidious distinctions operate.

Mr. Chapman

Would it not be the case that if this applied to National Insurance contributions it would apply to all sorts of other reliefs and we would have to allow a man paying very low taxation to have relief at 7s. 9d. in the £ on his child and marriage allowances? He would become entitled to more reliefs than he paid in tax.

Mr. McKay

My hon. Friend is complicating the matter because he is not in favour of what I am saying. This is a very simple plan which I think, if it were examined thoroughly, would convince anyone that the position is not fair. Even under the present scheme, with a little change the Treasury could regulate it so that the man paying £5 a year would not have a tax relief of only £1 6s. 3d. but at least as much relief in tax as the man paying at the rate of 7s. 9d.

What is the effect on the insurance scheme? Does it help the Exchequer? Not a bit. It is putting an extra burden on the Treasury. About two months ago, the Answer was given in reply to a Question that the employers are given a tax relief of £143 million in a year. In addition, the Treasury is paying about £40 million for insured persons. In other words, the Exchequer is doubly penalised under this scheme. If we were starting the scheme afresh, would we do it on the same lines as it is done now? We would not have a poorer section of our community paying the same contributions for the benefits included in the scheme and getting less relief. Surely there is something wrong about that. On a basis of fairness, how could we institute a system whereby the highly paid people would get their benefits for about half the amount of money paid by the lower income earners? I do not think that such a method could be agreed to if it were discussed before starting the national scheme.

If we go into the scheme properly, realise the amount of money that the Exchequer has to pay, the invidious distinctions that result and the changes that could be made if the Exchequer and even the insured person paid the same amount of money, I am satisfied that there are ways and means of rearranging the national scheme and doing away with these tax reliefs, if not entirely, at least in some respects, and get better benefits for the same total money.

When we examine the scheme financially, I cannot see how it can be declared to be right. Some people might say that if a method like this is introduced into the National Insurance scheme, whatever principle is adopted must be applied to all the other tax arrangements. That by no means follows. It does not follow that because one category is exempted, everybody must be exempted. The taxation system can be regulated in any number of ways to meet particular instances of unfairness.

I know that the subject is a peculiarly difficult one to deal with properly. At the same time, I am satisfied that there are ways and means of dealing with the whole problem and of rearranging the contributions and the tax reliefs in such a way that better benefits could be paid and the cost to the Treasury would be no greater than it is now. I simply wanted to put on record my objections to the whole system of tax reliefs in the national social scheme. It is entirely wrong in principle.

Sir Henry d'Avigdor-Goldsmid (Walsall, South)

All Members of the Committee will be grateful to the hon. Member for Wallsend (Mr. McKay), because the Clause is a complicated one and needs attention. It has got by with almost the minimum of discussion. The main argument in its favour was the one put forward by the hon. Member for Sowerby (Mr. Houghton), who knows the subject extremely well, in which he said that without the Clause something like chaos would be produced in the Inland Revenue offices. My hon. Friend the Financial Secretary was so excited that he bounced up and down in his seat to confirm the accuracy of the hon. Member's opinion.

These two experts, who know so much about the subject, have been bouncing up and down at each other confirming the chaos that would result if we tried to give people the tax allowances that were due on the premiums they have paid. As justification for not doing so, the hon. Member for Sowerby described the Government's proposal as rough justice. When he used those two words, a ripple of applause went along the benches opposite. Rough justice is what they want. [Interruption.] The hon. Member for Birmingham, Northfield (Mr. Chapman) may well deny it. I do not know whether he was awake at the time. Certainly, applause greeted that demand for rough justice. What is rough justice in taxation? Surely, it is injustice. There is no such thing as rough justice. Either there is justice or there is injustice. Rough justice is not justice.

I am quite unable to understand how the Inland Revenue can make sense of a situation when the two experts on the subject, the hon. Member for Sowerby and my hon. Friend the Financial Secretary, both agree that they cannot make sense of it. Therefore, the corollary seems to be that the Inland Revenue cannot make sense out of the situation. The taxpayer must have justice, and the only way in which justice can be done is to give an allowance in line with the maximum allowance to which he can be entitled.

9.30 p.m.

If we take that line, then the Inland Revenue is having to pay for the fact that it is not able to make sense out of the situation, and revenue is being lost, If the allowance had been raised to the £20 suggested, then in a year or so the Inland Revenue would have found that the problem was not so difficult and a graduated scale could have been introduced. That is supposition, but I say quite firmly that we are not here to administer rough justice but to administer justice to the taxpayer. He has nobody else to defend his interests and we should ask the Government to look at this to see if they can administer this in another way. They should undoubtedly grant the highest allowance suggested in these Amendments, namely £20.

Mr. Mitchison

I hope not to take up the time of the Committee, but there is one cogent argument in favour of the Clause which has not been mentioned, and that is that both sides of the industry, the British Employers' Confederation and the Trades Union Congress, have studied it and have agreed to it. In a democratic universe—or should I say a democratic country, since we had better be careful about the limits of it?—that is a very strong argument in a case like this.

I listened to the speech of the hon. Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) and I was not quite clear what he wanted. He said that he wanted justice. Justice appears to involve the withdrawal of the scheme but what he was to put into its place was not clear. At one moment it was that the taxpayer should have the maximum. Whether or not under the present arrangements or in a theoretical adaptation of them, he would get that or a great deal less. That is not justice. It is no doubt giving the taxpayer the maximum but it is no more—

Sir H. d'Avigdor-Goldsmid

Unlike his hon. Friend the Member for Sowerby (Mr. Houghton), the hon. and learned Member for Kettering (Mr. Mitchison) was not on the Committee which dealt with the National Insurance Act, when much of the argument by the hon. Member for Sowerby was devoted to the plight of the insured person under the scheme who was earning £15 or more. I feel that a little of the same argument might be devoted to him now, as he appears in a different capacity as a taxpayer.

Mr. Mitchison

I was not on that Committee, but I am tolerably well acquainted with what it did and said, and I remain completely uncertain as to what the hon. Member for Walsall, South wants. But I shall not take up more time on that.

In speaking on this matter in his Budget speech, the Chancellor said: … the only practicable solution is to have a flat-rate allowance for all adult employees. This will mean that some employee will get relief on slightly more than they pay, and others on slightly less. The amount of the normal allowance which I propose is £15. This is somewhat above a true average."—[OFFICIAL REPORT, 4th April. 1960; Vol. 621, c. 60.] What is the true average and how is it worked out? If one looks at the table in the Schedule, there is in the subsequent figures a distinction between men and women, but the Chancellor has told us that the only practicable solution is to have a flat-rate allowance for all adult employees—that is to say, both for men and for women. I do not understand why that should be possible in some cases and not possible in others.

In the Financial statement there appears an item of £11 million as being the cost of this Clause. That was not mentioned by the Chancellor in his Budget speech— at any rate it is not in HANSARD—

Mr. Amory

indicated assent.

Mr. Mitchison

—nor, I think, was it mentioned when the Bill was being introduced by him. Perhaps we could be told how the £11 million comes in. Is it the difference represented by somewhat above a true average? If so, perhaps the Financial Secretary could give us some idea of the total amount involved. I think that he has the sense of what I am asking. There are really two questions—one as between men and women and the other about the true average and the percentage.

Sir E. Boyle

I should prefer to write to the hon. and learned Member about how the computations are made, but I can give him the figures this evening.

Mr. Mitchison

All I want to know about the computations is why they have to be made on both sexes whereas some of the figures appear to relate to the sexes separately.

As to the Amendments, we found the right hon. Gentleman's remarks a little puzzling in the light of the sum mentioned in the Financial Statement. We did not quite know how to work it out. We felt that the £15 looked too small for the sort of reason that was indicated by the hon. Member for Southampton, Test (Mr. J. Howard). We still think that it looks too small, but if we are told that it is not, that there is good reason for it and that it is about the true average we might look differently on the matter. Therefore, we would prefer not to indicate our attitude to the last two Amendments until we have heard what is to be said on the Government side. We do not agree on the first Amendment and I respectfully adopt all the comments made by my hon. Friend the Member for Sowerby (Mr. Houghton) about the undesirability, from the taxpayers' point of view, as well as that of the Revenue, of an administrative shambles. It sounds very nasty.

Sir E. Boyle

I should like to assure my hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) that, despite my antics on the Front Bench, the seat will be still comfortable for any successor that I may have. The whole Committee appreciated the contribution of the hon. Member for Sowerby (Mr. Houghton), who managed not only to explain this lucidly but to invest the subject with a degree of enthusiasm which I should not have thought possible. It reminded me of the historian who sought in a pamphlet to distinguish between the Eucharistic doctrine of Luther, Calvin and Zwingli and not only succeeded in doing so but seemed to suggest that that was the one historical problem that mattered.

I should like not only to tell the Committee why the Government felt bound to adopt this principle but also to explain how all this arose. I agree that this is an extremely difficult matter. This is one of the most difficult Clauses in the Finance Bill. I wish that the subject were as simple and straightforward as the Editor of The Times made it out to be.

The reasons for introducing a flat-rate allowance are these. As hon. Members will be aware, under the existing law— Section 377 of the Finance Act, 1952— a deduction is due for so much of the National Insurance contribution as does not relate to unemployment benefit, sickness benefit or maternity benefit. The reason for that is that contributions which are paid to secure taxable benefits are admissible as a deduction in computing income for tax purposes. The true application of this principle to the new graduated insurance scheme would involve giving tax relief for the whole of the graduated contributions paid by the employee for part of the flat-rate or minimum contribution which goes towards taxation benefits.

The difficulty in giving a tax allowance on graduated contributions under the new scheme in the P.A.Y.E. coding in the same way as is done for existing allowances, is that it will not be possible in many cases to estimate in advance just how much graduated contribution an employee will pay in a tax year. When the P.A.Y.E. code number is being determined before the beginning of each tax year, the latest information which is available to tax inspectors about earnings relates to the tax year ending in the previous April; but earnings may very well fluctuate so much in the course of the succeeding two years that any estimates based on this figure would be wrong, and in that case the allowance would have to be adjusted by making an assessment after the end of the tax year. The probability is that the graduated insurance scheme would involve making so many assessments at the end of the year that the P.A.Y.E. machine would be in grave danger of breaking down completely.

That is the problem which we have to face, and I can tell the Committee that, very soon after coming to my present office, I had a talk on the alternative with the British Employers' Confederation. As a matter of fact, this subject had already been discussed at official level both with the Trades Union Congress and the British Employers' Confederation, and they were asked in confidence for their views on this possibility. I later discussed the subject myself with representatives of the British Employers' Confederation, and the Confederation objected very strongly to the extra work that would be thrown on employers by a proposal not to have a flat-rate scheme.

This is a difficult subject, and I would point out to my hon. Friends that there is no desire in the Treasury for rough justice for its own sake. I think that the hon. Gentleman enjoyed that part of his speech very much and so did we, but I assure him that there is no question of anyone wanting rough justice for its own sake.

The point is twofold. British employers will have an extremely difficult task with the new graduated insurance scheme. It will give them a great deal of extra work, and they represented to me—and I could not help feeling that this was a fair point—that any new P.A.Y.E. scheme of the sort that would be involved if we did not have a flat-rate scheme would be not merely different in degree but different in kind from anything they had had before. It would be a completely new kind of exercise, and I do not believe it is realistic to suppose that this Committee would impose such a duty on the employers of this country at a time when the new graduated insurance scheme was coming into operation and when they would have a great deal of work to do.

Mr. Graham Page

The hon. Gentleman said that it was a new exercise, but is not this exercise done already under Section 329 for superannuation schemes?

Sir E. Boyle

I am glad that my hon. Friend has raised that point because I know that my hon. Friend the Member for Eastleigh (Mr. D. Price) whom we all wish well tomorrow, has raised the same point.

The operations are very different indeed both in kind and scale, because contributions to a superannuation fund do not vary with weekly or monthly fluctuations, but are a known percentage of the year's earnings. Since membership of these schemes tends to cover workers whose earnings are comparatively stable, it is not too difficult to estimate in advance what the contribution will be. A further point is that superannuation funds still cover only a minor part of the employed population, whereas graduated contributions, at least in some weeks or months, will be paid by the majority of employees who are not contracted out of the scheme. I do not think that the two things are comparable.

I do not think that I need deal at length with the persons within the graduated scheme, but, in answer to my hon. Friend I should like to say something about what are called non-contributing or contracting-out employments, because that is the kernel of the Amendment. It is true that the flat-rate proposal is slightly generous to those who are contracting out of the graduated scheme, because they will receive a £15 allowance. They would be paying the same contribution at present for which an allowance of £13 is given to a man and £11 to a woman. They are thus receiving some benefit from a flat-rate allowance which pays some regard to graduated contributions which they do not themselves pay.

9.45 p.m.

The idea that there should be different allowances for employees participating in graduated schemes as compared with those applicable to contracted-out employees had some attractions in theory, and my right hon. Friend considered it. But if a different allowance were given to contracted-out employees it would be necessary to revise the P.A.Y.E. code numbers, and any change from contracted-in to contracted-out employment, or vice versa, would be an extremely big job. In many cases there would have to be adjustments in the taxpayer's liability after the end of the year. It was largely the necessity for avoiding end-of-the-year adjustments that led to the decision to give a flat-rate allowance for graduated contributions. The work of re-coding and making end-of-the-year adjustments would be less than the work of giving graduated reliefs generally, but it would be appreciable, and at a time when the Inland Revenue authorities and the employers are having a good deal of extra work we do not want to indulge in an exercise unless we feel it is really worth while.

My right hon. Friend believed that in making this approach the extra work involved would be largely wasted, because the distinction in the amount of the allowance would not in practice be reflected in the amount of tax deducted under P.A.Y.E. The P.A.Y.E. system is not geared accurately to reflect variations of this small order. I think that the hon. Member for Sowerby made that point. The distinction between the £13 allowance for contracted-out employees and the £15 allowance for non-contracted-out employees might produce no difference in the tax deducted, or it might produce a difference greater than the amount of tax on the £2.

There is the further point that to make a distinction between contracted-out and other employees would produce another anomaly. A contracted-out employee would get less relief than a non-contracted-out employee, notwithstanding the fact that the former might be paying a bigger contribution. The contracted-out man would get £13 in relief, the allowable part of his contribution being £13, whereas the non-contracted-out employee would get £15 in relief, even though the allowable part of his contribution might be as low as £10, because his wages were too low to make him liable to graduated contributions.

I am sorry to have to deal with such an extremely complex subject in this way, but I can assure the Committee that we have looked at it very carefully. Quite apart from the extra work involved, we do not believe that in practice it would be worth while making an exception of contracted-out men, partly because the fine distinction in the amount of the allowance could not be reflected in the amount of tax deducted under P.A.Y.E. and also because, having done all this work, and put this extra work on employers, the total effect might be merely to produce a fresh anomaly.

Having decided that there was no alternative to a flat-rate scheme, the question arose of what the flat-rate deduction should be. Here I want to answer one or two questions raised by the hon. and learned Member for Kettering (Mr. Mitchison). The average figure we have taken is £13 for a man and £12 for a woman. A flat-rate allowance of £15 will cost the Exchequer £79 million in a full year, which is £11 million more than the "true" relief of £68 million. That is the difference in the cost to the Exchequer. If we had a flat-rate deduction of £20 it would cost the Exchequer £25 million more. My right hon. Friend felt that even though there would be advantages, and slightly greater fairness with a flat-rate deduction of £20, or a higher figure than £15, we had to consider the Exchequer liability, and a sum of £25 million is much more than my right hon. Friend feels we could afford in present circumstances.

I will give a few examples of the effect of the £15 allowance. Of course it is inevitable with a flat-rate allowance costing approximately the same as the "true" relief, that employees in the lower income range will receive relief on slightly more than they pay, while those in the higher range will have relief on slightly less than they pay. But I assure the Committee that the maximum losses to individuals will be pretty small. So far as Income Tax is concerned, the greatest loss is that incurred by a single person with an investment income of £24 or above who would have had relief under the present law for his actual contributions without restriction of his earned income relief. He will lose £3 9s. 9d. a year if he pays the maximum contribution on earnings of £15 a week or more. That is approximately 1s. 4d. a week, and I do not think that one can say that a maximum possible loss of 1s. 4d. a week on an income of £15 a week in the case of a single person —although it is not ideal—could be described as very severe.

A married man with three children under 12 and with £24 investment income will lose only £1 18s. 3d. a year. An employee with no investment income whose earned income relief under the present system is restricted by deduction for National Insurance contributions will lose considerably less. A married man with three children under 12 will only lose 5s. 3d. a year.

The hon. Member for Southampton, Test (Mr. J. Howard) asked whether there should be a higher figure for men than for women, £20 for men and £15 for women. I do not believe that would work out very happily. It would save only £3 million altogether, so that the cost to the Exchequer would remain pretty high. If the flat-rate allowance of £15 were increased the increase would have to apply to men and women alike, in my view. The maximum allowable contribution for men would be £24 and for women £22. I think it would be difficult to justify increasing the rate for men to £20 and leaving the rate for women at £15, since it would lead to the result that a woman paying £22 allowable contribution would receive less relief than a man paying £10. We should get again into the position that in trying to achieve equity in one way, we should create new anomalies between some men and some women; and if the Committee voted for anything like that we should soon find considerable pressure for the removal of such anomalies.

I apologise for speaking at some length, but this is an extremely difficult subject. After giving it full attention we are sure that there is no alternative to a flat-rate scheme. I do not say that the figure of £15 is ideal, but this figure will cost the Exchequer £11 million. When one contemplates the very small losses which will be incurred as a result of a flat-rate figure of £15 I do not believe that it will be considered unreasonable, and I ask the Committee to accept the proposals of the Government.

Mr. Kenneth Lewis (Rutland and Stamford)

In view of the fact that the hon. Member for Eastleigh (Mr. D. Price) has put his name to this Amendment and in view of the fact that after tomorrow he will be engaged in participating employment, I wonder whether my hon. Friend the Financial Secretary could have a word with him when he returns to see whether he can give him any hope for the future for this Amendment?

Mr. J. Enoch Powell (Wolverhampton, South-West)

Despite the detailed reply of my hon. Friend the Financial Secretary and the whirlwind eloquence of the hon. Member for Sowerby (Mr. Houghton), who was in his element this evening, I wish to ask my right hon. Friend to address his mind once again to the necessity for this proposal before this Clause finally passes into law.

There is, of course, precedent for the device of an average rate of tax. We have it in relation to dividends paid by building societies. We have it in relation to the repayment of pension contributions when an employee gets them back upon leaving a scheme. Nevertheless, it is something which we ought not to introduce into the tax law without very clear and certain necessity, for it involves undoubted injustice. In this case, as my hon. Friend did not conceal, it means that large numbers of people will receive allowances for more than they are contributing under the insurance scheme and—what is more important—large numbers of people will receive less by way of allowance than they are obliged to contribute. Indeed, in the extreme case, although it is a case which will cover, I should imagine, millions of people, I believe there will be as much as £9 excess of the compulsory contribution over the amount which is allowed for tax.

I ask my right hon. Friend not to under-estimate either the significance of so apparently small an allowance upon an income of £750, or the irritation and sense of injustice which an anomaly of this sort can create. I submit that there is no real analogy with the flat rate allowances of a quite different kind which the hon. Member for Sowerby mentioned. There is no real analogy between what we are doing here and, for example, the flat rate allowance of £75 for a housekeeper. We are here concerned with the case where under the general law a man is entitled to have allowed the actual amount which he pays by way of premium—and he is here paying it, once he is in the scheme, compulsorily—in regard to a future pension.

Even at this stage I remain not entirely convinced that it is either impossible to separate those contracting out from those remaining in, or, whether by way of P.A.Y.E. or of subsequent adjustment, to ensure that people receive the actual allowances to which they are entitled in virtue of the sums which they have contributed.

There is, however, not only this consideration of the undesirability of giving people avoidably unfair tax treatment. Another consideration, which has not been mentioned this evening, and which is of some importance, is that it was the intention of Parliament that those concerned should choose freely whether they would be inside or outside the new graduated scheme. They were, of course, to weigh in their own circumstances the alternative merits and benefits of being inside or outside; but what we are doing here is inevitably to introduce an unintended fiscal weighting of the scales in one direction or the other. For the man who is earning £12 a week and upwards it will undoubtedly be a consideration that if he is in the scheme he will not get tax relief for the amount of contribution which he actually has to pay. I am sure it was not anyone's intention that there should be this fiscal weight placed into the scale of that free decision.

Therefore, while recognising the care with which this matter has been treated, I suggest to the Committee that it is an important one. The Tightness or wrongness of the decision we take on this matter may long be felt, and will be a matter which comes home to hundreds of thousands of people in their tax experience. I hope my right hon. Friend will once again address his mind to this matter before it is finally decided.

10.0 p.m.

Mr. Mitchison

We venerate, but do not share, the purism of the hon. Member for Wolverhampton, South-West (Mr. Powell), and, in view of the agreement between the principal parties concerned, we accept the explanation that was given by the Economic Secretary to the Treasury as regards the figures and the average.

Mr. Amory

I should like to emphasise what my hon. Friend the Financial Secretary to the Treasury said—that we ourselves are not enthusiastic about this scheme, because of its admitted imperfections. I should like to repeat that we started with a very strong desire to have a more exact system. We had discus- sions on several occasions with representatives of industry about this, and we wanted to find an accurate way of reflecting the exact contributions from the point of view of tax allowance, but we had to admit that we could not find a practicable scheme.

In regard to those who contract out, I should like to remind my hon. Friend the Member for Wolverhampton, South-West (Mr. Powell) of a fact of which I am sure he is aware. So far as one can see, there will be quite a large number of people who will be going in and out of the graduated scheme. This is not a question of a once-and-for-all movement, and that introduces very great administrative difficulties. I can only repeat that at present, in our best judgment, there is not a practical alternative to this proposal. I admit its imperfections, but I hope that hon. Members will bear in mind what the Financial Secretary said—that, as far as P.A.Y.E. is concerned, there are inherent in that scheme a number of imperfections, some of them making a good deal more difference than this proposal does.

Having said that, pursuing the thoughts of my hon. Friend the Member for Wolverhampton, South-West, I certainly say that we will continue to study this, and, if and when we can find any other alternative, at whatever stage of the proceedings, I shall come to the Committee with great gratification to say that we had found one, but I should be deluding the Committee if I said that I thought that at present there was an alternative within sight.

Mr. J. Howard

In view of my right hon. Friend's reference to the imperfections concerned, and of the assurance that he will study the matter further, I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Mr. Mitchison

I beg to move, in page 12, line 13, at the end, to insert: (7) This section shall apply in relation to contributors under arrangements made by virtue of section sixty-three (arrangements with Northern Ireland for unified system) or under provision made by virtue of section sixty-four (reciprocal agreements with Dominions, Colonies and foreign countries) of the National Insurance Act, 1946, as it applies in relation to contributors by virtue of other sections of that Act: Provided that—

  1. (a) nothing in this subsection shall entitle any person to more than one deduction under this section;
  2. (b) the amounts for relief specified in the Third Schedule to this Act and Part 11 of that Schedule shall not apply to persons claiming by virtue of this subsection; and
  3. (c) the Commissioners of Inland Revenue may from time to time make regulations—
    1. (i) specifying the amounts for relief appropriate to such persons as last mentioned, regard being had to the relevant arrangements or provision under the said sections sixty-three and sixty-four and the amounts being such as not to exceed the amounts which would have been appropriate for similar claimants under other subsections of this section, and
    2. (ii) generally for carrying out the provision; of this subsection.
There are two Sections of the National Insurance Act which provide for arrangements, in the one case with Northern Ireland and in the other with Dominions, Colonies and foreign countries, for reciprocation as between the insurance schemes of this country and the other countries concerned. These are carried out by Orders, which are tolerably numerous and pretty complicated.

Perhaps at this hour of the night, it would be sufficient, in dealing with them at this stage, if I said that I have looked carefully through one of the reciprocal Orders, the one with Norway. It seemed to me that there were circumstances in which, possibly, a national of this country would, on the one hand, be liable for Income Tax in this country, and, on the other hand, would not be liable to make a contribution to our National Insurance Scheme but would make a contribution to the Norwegian national insurance scheme. If I give the instance, I hope the Committee will be grateful if I do not read out the lengthy and rather complicated Order.

One instance is where a British national, resident in this country, is employed by a Norwegian whaler or by the English branch of a Norwegian company. That is one case, and another is that in which a British national serving on a Norwegian ship under a whaling contract may be liable, as I understand it, to pay Income Tax in this country but to contribute to some special arrangement about the pensions of whalers in Norway and not to the British insurance scheme.

If the Government are prepared to say that there is no case in which a person can be liable for British Income Tax and also be liable for foreign but not British insurance contributions, obviously there is nothing in the Amendment but, speaking for myself, I should require some convincing of that, because I think there are cases, although no doubt they are not numerous.

If there are such cases, I fully appreciate the difficulty of dealing with the past. I believe I am right in saying that in those cases there has been no Income Tax concession corresponding to that made by the Income Tax Acts which the Economic Secretary mentioned and which relates to part of the National Insurance contribution. But if there is to be a flat-rate contribution, it has at any rate the advantage, I suggest, that we can remedy what is an injustice, because it is not right that anyone should be entitled to make deductions in this country against British tax in respect of contributions to our insurance system while he should not be entitled to do so in respect of an insurance system to which he is just as liable to contribute as to the English system and from which he will draw benefits broadly corresponding to those of the English scheme.

In view of the time and a certain tedium inherent in the Finance Bill, I have tried to put the point as shortly as possible, and I hope that the Government will tell us that they accept the Amendment, because although the cost is small—as I think it would be—and the number of cases is small, there are, or even might be, some cases in question.

Sir E. Boyle

The Committee will be glad to learn that my reply to the Amendment will be much shorter than that to the previous Amendment. The Amendment has two parts. The first deals with Northern Ireland. I can assure the hon. and learned Member for Kettering (Mr. Mitchison) that the reference in the Amendment to Northern Ireland is unnecessary. True, there are in force arrangements with Northern Ireland for a unified insurance system, but no contributor is debarred under the Clause as drafted from relief which he could obtain by virtue of a reference to Section 63 of the National Insurance Act. Contributions under both the National Insurance Act and the Northern Ireland Act are covered by the Clause as it stands.

The position in respect of Commonwealth and foreign countries is a little more complicated. A number of reciprocal agreements on National Insurance have been entered into under which persons ordinarily resident in the other country who come to work over here for an employer of their own country may keep up their home insurance contributions and be exempted on this account from payment of British Insurance contributions. Since these payments are not made under the National Insurance Act, they do not qualify for relief at present from United Kingdom tax with the exception of a country with which we used to be more familiar in the Committee than we are—the Isle of Man—for the Isle of Man agreement provided a unified system with the British system.

I do not know how many of these cases will arise. So far, it seems that the problem is likely to prove a small one. We have had very few complaints about the tax treatment of these contributions, but I saw one not long ago from the hon. Member for Sowerby about an Austrian resident here who was voluntarily paying contributions to the Austrian scheme. Since there is no reciprocal agreement with Austria, in that case there will be no benefit under the Amendment.

Over twenty reciprocal agreements have been concluded. The insurance schemes in the countries concerned vary considerably. The general principle of United Kingdom tax law is to give relief only for contributions, such as pension contributions, which go to provide taxable benefits. Clearly there would not be justification for allowing a more generous relief to contributors under a foreign scheme. However, there is clearly some theoretical merit in the proposition that an employee from a foreign country, who is working over here and liable to tax on his earnings, should receive some tax relief from contributions compulsorily paid to a foreign insurance scheme, by virtue of which he is exempted from liability to pay British National Insurance contributions.

I do not think that this problem is likely to arise very often, but it is rather a complex problem to which my right hon. Friend may like to pay some attention. I do not think that the hon. and learned Member's Amendment will quite do as it stands, but it is a question which I would very much like to explore. Without making any commitment for the future, I suggest to the hon. and learned Gentleman that I should explore this question with my right hon. Friend and that we should see, at a later stage of the Bill or on some later occasion, whether there is any way of meeting this point. It is a rather serious and complex matter of a limited kind, and I suggest that we might have time to look at it.

Mr. Mitchison

I appreciate the tone of the hon. Gentleman's answer. I must point out one thing to him. He said, perhaps inadvertently, that it is a question of choice. It is not a question of choice. Where certain conditions are fulfilled, the Agreement itself may oblige a British national employed by a foreign resident in this country to contribute to the foreign employer's national insurance scheme and not to the British one. Therefore, there is exactly the type of unfairness which the Financial Secretary indicated he appreciated.

As regards the amounts, I did not mention the Amendment in detail, but it was because of that sort of question that we left it to the Treasury or the Commissioners—I forget which—to make Regulations, subject to their not exceeding the British amounts. Therefore, we left it at large.

The Financial Secretary said at the end of his remarks that he and his right hon. Friend would examine the matter either at a later stage of the Bill or on some other occasion. It may be technically complicated, but it does not involve, I imagine, extensive inquiries. If the Financial Secretary can assure me that he will bring in something on Report, or explain why he cannot bring in something—one or the other—I should be glad to withdraw the Amendment.

Sir E. Boyle

I will certainly undertake either to table an Amendment on Report stage or, if the hon. and learned Gentleman tables an Amendment on Report, to explain more definitely just why we cannot deal with this problem. While I agree that the actual investigation can he made without too much difficulty, in the sphere of drafting and getting the law right in this respect it may not be altogether an easy matter. I will certainly undertake either to table an Amendment or, if the hon. and learned Gentleman tables an Amendment, to give a more definitive explanation than I have given this evening.

Mr. Mitchison

I deeply regret having to disappoint my hon. Friends, who are acutely conscious of the importance of the matter and where the balance of justice lay, and would no doubt have liked to press it to a Division, but in view of what has been said, I have no alternative but to beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Clause ordered to stand part of the Bill.

Third Schedule agreed to.

10.15 p.m.

Mr. Mitchison

I beg to move, That the Chairman do report Progress and ask leave to sit again.

We have got through a number of Clauses, and the next Clause, Clause 18, is obviously an extremely complicated one which has provoked a number of Amendments and will provoke a number of discussions. I hope the Chancellor of the Exchequer will agree that it would be very undesirable to embark on it at this hour of the night, because if we were to press it to a conclusion we should be left hobby farming till the dawn, which I am sure he would not wish.

Mr. Amory

I think we have made fair progress, Sir Gordon, but I thought that it was the wish of both sides that we should get some way through our consideration of the Amendments to Clause 18 before we went home this evening. I rather thought that that was the general wish of the Committee. We have such a tremendous amount of work ahead of us on the Bill that I would have thought it desirable that we tried to make some progress in this direction before reporting Progress.

Mr. Mitchison

It is perfectly true that at an earlier stage we had hoped to get into Clause 18—if I may put it in that way—but we had a very long, a very full and a very interesting debate on the rates of tax and, quite frankly, speaking from this side of the Committee, we have not made the progress for which we hoped. I suggest to the right hon. Gentleman that it would be rather unsatisfactory now to take one or two of the Amendments to this Clause. They do hang together a good deal, and I think that we should only get ourselves involved in matters that would have to be discussed partly today and partly tomorrow. In the interests of all concerned, I hope that the right hon. Gentleman will relent and lend his support to the Motion.

Mr. Hirst

I should very much like to support the hon. and learned Gentleman the Member for Kettering (Mr. Mitchison). His Motion is absolutely right and proper. Clause 18 is a fundamental Clause and has a very considerable significance about which a large number of hon. Members have a great deal of concern. To start on it at this late hour, when many of us did not expect it to be dealt with, would not, I think, be treating the Committee with that degree of responsibility and respect that we expect from my right hon. Friend. I support the hon. and learned Gentleman's Motion very strongly indeed.

Major W. Hicks Beach (Cheltenham)

I, too, support the Motion, and if the hon. and learned Member for Kettering (Mr. Mitchison) presses it I shall certainly vote with him. It is quite absurd to proceed further with this present business tonight.

Mr. Mitchison

I apologise to the Committee for saying that we would have to continue the discussion of the Clause tomorrow. If, by any chance, we do start it this evening, we shall be unable to continue our discussion until after the weekend, and it is such a complicated Clause that we might by then have forgotten what we had said about it tonight.

Dr. Denzil Freeth (Basingstoke)

May I add my plea that we should wait until after the weekend to begin our debates on this very complicated Clause, into which some of us want to go in some detail. I think that late on a Thursday night would really be a rather unfortunate time to start our discussion.

Mr. Harold Wilson (Huyton)

I think it was hoped that we would make a start on Clause 18, which is a very meaty Clause, and that we might have been able to dispose of one or two Amendments, but things have gone a little slower than some of us had imagined. There can be no complaint about that, because the Clauses that we have dealt with have been those that affect personal allowances and the whole mass of the taxpayers.

If I could feel that we could, perhaps, get on to the first Amendment standing in the name of some of my hon. Friends and get through it quickly, that would be one thing, but I know that the feeling about Clause 18 which exists on the opposite of the Committee is such that if we were to make a start on it even our uncontroversial Amendment—as we think it to be—might provoke a certain amount of discussion, and that it would not be for the benefit of the Committee to go on and on with it. It might be better if we had time to look at Clause 18 and start as fresh as I hope we shall be next week. I think that Clause 18 may take quite a time, and I suspect that there will be at least as much talking on it from the benches opposite as from this side of the Committee.

Mr. Amory

I am bound to say that I think it conceivable that the allegedly non-controversial Amendment might take a little time to discuss. I suppose I am suffering from an excess of keenness. I realise that satisfactory progress must be based on good will, and I recognise that we have made a certain amount of useful progress.

In spite of my natural enthusiasm to proceed as rapidly as possible with our business and record the maximum amount of progress, I should not, after hearing the representations which have been made, wish to oppose the Motion.

Question put and agreed to.

Committee report Progress; to sit again Tomorrow.