TAX AND SHORT TERM SOCIAL SECURITY BENEFITS

HC Deb 11 July 1978 vol 953 cc1382-404

'In Chapter II of Part I of the Taxes Act the following is inserted after section 27:—

"27A.—(1) Subject to subsection (2) below, the relief to which a person would be entitled under the preceding sections of this.Act shall be reduced by one fifty-second for each week of the year of assessment in respect of which he has received a payment by way of unemployment benefit, sickness benefit or supplementary benefit.

(2) Subsection (1) above shall not have effect so as to reduce the claimant's relief below that to which he would have been entitled if the Finance Act 1978 apart from section (tax and short term social security benefits) had not been passed.".'—[Mr. Ridley.]

Brought up, and read the First time.

Mr. Ridley

I beg to move, That the clause be read a Second time.

This new clause relates to treatment of short-term benefits for tax purposes. I think that its form owes its inspiration to the hon. Member for Islington, South and Finsbury (Mr. Cunningham) who last year, in our Finance Bill debates, pursued this point with skill and effectiveness. We had a good debate on that occasion, but my intention now is to allow a discussion on the subject of how to treat these benefits.

It is becoming generally accepted that short-term benefits should be taxed. Perhaps I could first consider the possible methods. It is of course possible to pay them net of tax or to ask at the end of the year for a computation of the total income of those who have been on short-term benefit, which would in due course give rise to such charge to tax as it did.

However, the hon. Member for Islington, South, whose ideas the clause seeks to enact again, suggested that the personal allowance should, as it were, be whittled away by one-fifty-second for each week that a short-term benefit had been drawn. If a short-term benefit was drawn for a whole year there would be no personal allowance left. That has the great advantage of being easy to administer and much the most simple method from the point of view of ensuring that the tax is obtained. I will not go into the relative methods of doing this. That is, perhaps, too technical for me. I do not believe that Government advisers in high places who say that it is not possible to tax short-term benefits are right.

The method suggested in this new clause is certainly practical, although there may be better methods for all I know. I am attracted to this method because it must mean that the value of the personal allowance on the whole, not in all cases, is fairly close to the annual value of a short-term benefit. It depends upon which short-term benefit is in ques- tion, the number of children's allowances, and many other factors. As a piece of rough justice it seems pretty close to the right method.

I make it clear that in seeking to tax short-term benefits one would not tax anyone who was simply in receipt of short-term benefits for any one year. Broadly speaking, there are two groups of people who receive such benefits and who should be subject to tax on them. First, there are those who draw short-term benefits for a short portion of the year and then return, perhaps, to a high level of income. Secondly, there are those who have considerable income from, say, pensions or investments or other sources and who are able to draw short-term benefits free of tax. There are many over the age of 60 who have retired but who treat it as part of their normal income to have unemployment benefit in addition to their pension. They believe that they are entitled to that, and they may well be.

The point is that it cannot be right in those circumstances for a substantial and continuing source of income to be free of tax. This latter matter has been dealt with on a couple of occasions by successive Governments. Both attempts were unsuccessful because there are deep and contentious political issues at stake in the taxation of unemployment benefit for those who treat it as part of their retirement emoluments. Nevertheless, I believe that both the categories I have mentioned should not be allowed to achieve those benefits tax-free. After all, a man who has £100,000 a year and is able to draw unemployment benefit is receiving, at his rate of tax, an added income supplement which would be worth, if he had to pay tax, many thousands of pounds a year.

The Financial Secretary was good enough to answer a Question of mine in which he set out the list off these benefits. There is an enormous number but only eight are wholly taxed. There are 30 different types of short-term benefits which are not taxed. It is not a very happy situation in which some benefits are partly taxed. Apparently there is a new phrase now to the effect that some State benefits are taxable in principle but not taxed. There is considerable confusion as to which benefits should be taxed and which should not be even under the present law. This is an area where we should expect some clearing-up operation irrespective of what I seek to do now.

The main non-taxable benefits are sickness, unemployment and social security. I will not go into the list of other benefits. Many seem to be benefits paid over a considerable length of time and they could be taxable. I have never believed that we should go about our affairs in the social security sphere by making some benefits non-taxable. I must confess to my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) that I was unable to support him when he succeeded in making war widows' benefits taxable only as to half. I believe that a much more satisfactory way throughout is to pay a benefit, whoever the recipient may be, which is able to provide him with a proper standard of living—depending on the circumstances, of course—and then to subject all benefits to tax.

By this means one does not pay gratuitously large after-tax sums to people who do not need them. Equally, it is right that the tax law of the land should extend to everybody and that there should not be exceptions, because it is those exceptions which will invite people to change their particular category in order to try to get into that slot. I think that that is distorting as well.

I do not feel that this is at all the moment at which to press the new clause, but in view of the evident and obvious change of thinking in both parties, and certainly in the country as a whole, I think that we should turn our minds to thinking of taxing short-term benefits. I hope that the Financial Secretary will be able to respond with some constructive ideas and some of those pledges from him, to which we are getting so accustomed, that he really is making progress in this direction.

Mr. Powell

I do not think that the hon. Member for Cirencester and Tewkesbury (Mr. Ridley) need apologise—indeed, he did not—for bringing before the House in the form of this amendment a subject which in one form or another has been agitated for at least the last 10 years, and which I believe will not rest until it is properly resolved.

Income tax is a tax which is essentially levied on an annual basis, and yet for almost the last 40 years an important part of the mechanism of the collecting of that tax has been upon a weekly basis. This intersection between the basis of collection of much of the tax, and the underlying principle of assessment of income for the purposes of a tax, leads to the unjustifiable inequity to which this amendment draws attention from one side.

The present position is that two taxpayers, otherwise in identical circumstances, and receiving the same income in the course of a year, may pay substantially different tax because, in the case of one of those taxpayers, the income was partly made up of various forms of benefit. That inequity is, I think, in principle no longer seriously challenged. Indeed, in the Committee stage of the Bill the Minister, answering for the Treasury, quite candidly asserted that it was now only practicability which stood between the House and the removal of that inequity.

It is no longer argued, as it was perhaps 20 or 30 years ago, that there was something special about these forms of income by way of benefit which justified and, indeed, required their being omitted from the computation of annual income. That point of view is no longer urged, and so we are face to face with the radical inequity of two identical annual incomes of taxpayers in identical circumstances differently dealt with.

It cannot be brushed aside on the ground that we are dealing, in the case of persons whose annual income is partly made up of benefits, with taxpayers whose income has fluctuated in the course of the year. These are not the only taxpayers whose incomes fluctuate in the course of the year, and it is of little use for a taxpayer in other circumstances to represent to the Inland Revenue, at the conclusion of a tax year, that admittedly that is his total income, but he did not receive it uniformly over the 12 months and, therefore, he ought not to be treated like another taxpayer whose total income is the same.

9.30 p.m.

Quite frankly, we are now facing one barrier only between ourselves and the removal of this inequity, and that is the alleged impracticability. Fundamentally, as I said at the beginning, the impracticability derives from the weekly, or hebdomadal, form of collection of part of the income tax. This is an argument which is becoming less formidable as the years go by. Indeed, I thought I detected —for it is the tone as well as the words of Treasury Ministers which is informative—rather less confidence and conviction in the tone of the Minister of State when he was referring to this matter in Committee. It is becoming increasingly difficult to believe that when huge and complicated masses of statistical information can be handled by computer, there is something special about the statistics of weekly receipts adding up to annual income which is impregnable to attack by computer.

The whole system of the social security is now widely computerised and it is time that the Inland Revenue again started upon the exercise of investigating the practicability of restoring equity by bringing into tax sums which everyone agrees ought to be, and inherently are, taxable, namely, the benefits which form part of the annual income of a taxpayer.

As the hon. Member for Cirencester and Tewkesbury said, this is probably not a new clause to be pressed in its present form. Indeed, it may well not be in this way at all that this problem is to be approached and solved. But what ought to be forthcoming from the Government —I can tell the Financial Secretary that if it is not forthcoming this year, the year is not far ahead when it will be forthcoming., so he might step forward to pluck the fresh laurels—is an undertaking that a completely radical review of the practicability and methods which would enable these benefits to be brought into taxation will be initiated and the results will be brought forward by the Government before the next annual Finance Bill.

Mr. Ralph Howell (Norfolk, North)

I should like to support my hon. Friend's new clause. A mistake has been made in this area for a very long time. It dates from 1949 at the time of the Attlee Government. Then it was a mistake of no consequence, because at that stage the tax thresholds were well above the national average wage and so no problem was caused. But year by year, under all Governments, we have lowered the tax thresholds until instead of their being 100 per cent. of the national average wage they have now fallen to about 45 per cent. It is an extremely serious matter with which we are dealing.

It is costing the regular workers of this country, the people who work year in and year out, probably more than £500 million a year because of this silly mistake, which has been known in this House for the last eight or nine years. Yet no Government seem to have the courage to put it right.

I am not enamoured by the new clause. It is messy. It is the only way in which we can bring the principle before the House and discuss it. However, I commend new clause no. 36 to the Financial Secretary, which he could introduce. It would make a clean sweep of the problem. It would mean that any amount paid out by the Government would be registered on the P45 form, just as all other income for employed persons is registered.

I can understand why Treasury officials will not listen to my suggestion. It may be that I am a little cynical, but I believe that one reason is that it would put out of work a number of people who calculate all these tax rebates. However, it is my hope that we might rise above that.

I want to draw attention to how serious this matter is. In the most recent figures that I have seen, it is proved that if a man with a wife and two children is in receipt of tax rebates, he has to earn more than £75 a week to equal the spending power of a person who is unemployed. If he has four children, he has to have a wage of more than £95 a week to equal the income of the man who is unemployed or sick whilst he is in receipt of tax refunds—and we must not forget that the tax refunds go on until all the tax previously paid has been refunded. That is extremely attractive to a great many people—[Interruption.] I wish that the Financial Secretary would listen to this argument. It would be a feather in his cap if he had the good sense to take on board new clause no. 36. It would help him no end. Regular workers are getting utterly sick of the existing position.

I want to draw attention to another matter which is even worse. It concerns the position of pensioners. Pensions are taxable. Unemployment benefit, sickness benefit and supplementary benefit are not taxable. I have drawn the attention of the Chancellor of the Exchequer to a case which came to my notice the other day involving girls from EEC countries who were living in a YWCA hostel in Bristol and being paid £21 a week in supplementary benefit—more than a single pensioner receives. The difference between the two sums is that the £21 is not taxable whereas the pension is taxable. It is difficult to think of anything more absurd than the way in which we operate the system at present.

I shall not waste any more time talking to the Financial Secretary. I know that I shall not get much sense out of him. However, I want to direct a few remarks to my own Front Bench and to tell them that they will be making a ghastly mistake if they go in for tax credits in the form suggested in 1972. If that happens, unemployment benefit and sickness benefit will be made taxable—although we trust that they will not be taxed because it is to be hoped that the tax thresholds will be above their levels—but supplementary benefit will still remain untaxable. This will lead to a serious discrepancy between short-term unemployment and long-term unemployment. Once a person gets into the long-term bracket and begins to receive social security, he will be in a more favourable position than before. We shall make a silly mistake if we only half tackle the problem. It could be corrected in its entirely merely by adopting the form of words that appears in the amendment in my name—

Mr. Speaker

Order. I was very kind to the hon. Member, but his amendment was not selected. In fact it was out of order.

Mr. Howell

Yes, I realise that. I finish by giving my fullest support to the slightly messy new clause of my hon. Friends. I wish it well and simply say that there is a better way of doing it.

Mr. Nick Budgen (Wolverhampton, South-West)

The right hon. Member for Down, South (Mr. Powell) said that it is only a matter of practicability which stands between reform of this anomaly and the present situation. Is it as simple as that? So many people are in receipt of short-term benefits in one form or another. Surely if everyone was taxed on the receipt of any short-term benefit it would not be a mere question of inconvenience for the Inland Revenue, it would be a question of employing very many more people.

No doubt the figures that the Financial Secretary has extracted from the Inland Revenue and the Treasury will be exaggerated. There is no doubt that he has been given a particular range of figures on the cost and the number of people required to tax the benefits. There is no doubt whatever that the Financial Secretary will select the figures at the top of that range. It is plain that there will be a cost, and nobody in this House can say precisely what it will be.

The real answer is that if we could ever get back to sound money, if we were able to stop increasing the short-term benefits year in year out and stop indexing them, many of the problems would go away. As my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) said, when these benefits were first introduced in the period immediately after the war, the gap between the earnings of a man with five children and on a low wage and the money paid to a man who was temporarily unemployed also with five children was nothing like as small as it is now. It is a combination of the year in year out wage control and persistent indexing of short-term benefits that has made the gap smaller.

If we were able to deal with the problem of inflation, and then in happier times were able to stop indexing these benefits, it could well be that the problem of practicability would go away and we would not have to employ such a large number of extra civil servants in the Inland Revenue to deal with this grave injustice and anomaly.

9.45 p.m.

Mr. George Cunningham (Islington, South and Finsbury)

I apologise for intervening in this debate as I was not present at the beginning of it, but it is a familiar subject. I have no intention of repeating the speeches that I made in Standing Committee last year on this matter. I hold to the view that I held then—that in principle short-term benefits should be taxed, and that the only objection is one of administrative difficulty.

Since moving a new clause last year in Standing Committee which was substantially or completely identical with this clause, I was able with the blessing of the Financial Secretary to have discussions with Inland Revenue officials to clarify my mind about the exact nature of those administrative difficulties. I was persuaded that the administrative difficulties were a little greater than I appreciated last year in Standing Committee, but I was not persuaded that they were insuperable.

Basically, the exercise is as follows. With the involvement of—I have no doubt this was an exaggeration—13,000 civil servants at a financial cost of £50 million, £500 million could be collected. The Inland Revenue may regard that as a bad bargain because that ratio is less favourable than the ratio between administrative cost and product which applies to revenue collection generally. But I do not believe that that ratio of one to ten is less favourable than any other marginal element in revenue collection. I believe that for an outlay of one an income of ten is a good bargain, especially if at a time of high unemployment one gets 13,000 paid jobs into the bargain.

The administrative difficulty arises basically for the reason, as I understand it, that the social security offices would have to inform the tax offices of what they had paid out, or in my arrangement simply that they had paid out to individual recipients for a certain number of weeks. The Government say that the problem involved in one Government Department or network, namely the social security offices, finding out which local office in the other Government network, the tax office, is applicable to any particular member of the public is well nigh insuperable. It cannot go on in that way. We must have some system by which, on the production of a piece of paper, one can find out which tax office is handling which member of the public's tax affairs. I understand that this is already done in Scotland because there is one central register for tax matters there. But it is not done in England, and I believe it must be done.

Already national insurance numbers are used to some extent in the registration of tax papers, and, even without the fundamental change in the administration of the tax system which many people would like, it surely must be possible by the use of national insurance numbers to find out quickly and without great cost which tax office is handling which member of the public's affairs.

The Government say that there will be no incentive for the applicant for social security benefits to provide the information which would allow that office to find out which office his tax office was. In my arrangement there would be one big incentive: he would not obtain any money until he did give than information. I do not see anything hard about that arrangement. The applicant is applying for central Government funds. All one is saying to that person is that, before the money is paid out, the Government want to know which is his tax office. Until he supplies that information, one does not pay out the short-term benefit.

We are not talking about peanuts. We are talking of £500 million. Think of all the good purposes, either by way of extra expenditure or abatement of other taxation, for which one could use that money.

A way must be found. If we defer from year to year the taxation of short-term benefits in the hope that some day there will be a negative income tax system, we may defer it for far longer than is necessary. If it means the outlay of £50 million to gain £500 million, which can then be distributed more in accordance with needs and deserts than the present system, that would be a desirable reform.

I hope that in the light of the resumption of the discussion that took place in Standing Committee last year the Government will re-examine this matter and conclude that the administrative difficulties are not as great as were perceived and that in so far as they exist things can be done which remove or at least reduce those administrative difficulties. I hope that some indication to that effect can he given by the Financial Secretary and that he will not simply say that for the foreseeable future we cannot touch this because the administrative difficulties are too unbearable to contemplate.

Sir G. Howe

This is clearly an important point and its development in debates in the House owes a great deal to the assiduity of the hon. Member for Islington, South and Finsbury (Mr. Cunningham) and my hon. Friend the Member for Norfolk, North (Mr. Howell), both of whom have pursued the topic with relentless energy—intellectual and inquiring—and have made it a topic which cannot and should not be ignored and, interestingly, one which apparently commands universal support in the House.

I am sure that my hon. Friend the Member for Norfolk, North will forgive me if I do not deal at length with the important point that he made about tax credits and the tax credit system. Since the scheme was originally proposed, time has moved on and there have been a number of developments. For example, child benefits have been implemented as part of such a scheme.

We are told that the computers that will be a necessary part of a tax credit scheme are not likely to be in service until the mid-1980s. One always takes such estimates with a pinch of salt, but waiting for computers for the tax credit system is no reason for not addressing ourselves to this problem. Having to wait for computerised tax credits gives us all the more reason for addressing ourselves to this problem quickly. The point that my hon. Friend the Member for Norfolk, North made about a pattern of untaxed supplementary benefits running alongside a tax credit scheme when it arrives is also an important problem that must be taken into account.

However, the issue is more remarkable and fundamental than that. How often do Treasury Ministers sit on the Front Bench, backed by their advisers, and witness a House unanimously crying for a tax to be imposed which would yield £400 million or £500 million? The Financial Secretary has become so inured to the experience on this matter that he may be punch drunk, but it is remarkable that Parliament has plainly come to the view that here is a pattern of income which should be taxed, in equity, efficiently and in every other way. Moreover, it was the original intention of the architects of the system in 1948–49. The system started on the basis that these benefits were subject to tax and they were being taxed. The reason that that did not continue was not a sense of revulsion among politicians at the time who thought that they had done the wrong thing. It was an administrative reason, which may have been intelligible at that time when PAYE was being run in but which has become less tolerable as time has gone by.

There is a plain element of inequity. A person drawing £50 a week in one form of income pays tax on it and another person drawing the same amount in another form of benefit does not pay tax. That is the simplest illustration. It was much more elaborately demonstrated by the hon. Member for Islington, South and Finsbury who has pointed to the example of a man who can go out of work for the last six months of a year and remain out of work for the first six months of the next year and collect a substantial tax benefit. That is unjust and is increasingly widely seen as unjust.

As the right hon. Member for Down, South (Mr. Powell) said, it arises from the disjointed nature of a tax system which is based on annual income and a benefits system which is based on weekly income.

Mr. George Cunningham

The most dramatic illustration of this oddity is the case of a printer in the newspaper industry who works three nights a week for an income which is enormous compared with that received by most people in the country—so much so that it places him well above the higher tax thresholds —and who, in addition, through decisions of the independent insurance officers, is allowed to register as unemployed for the remaining days of the week, unlike most other workers, and therefore gets tax-free unemployment pay for those remaining days. He escapes not only 33 per cent. tax, but, in his case, probably 60 per cent. tax.

Sir G. Howe

That is the most dramatic illustration of the many produced by the hon. Gentleman. The reality is that there is now no one on either side of the House, on any wing of either party, who is prepared to defend the existing system. We come back to the central point made by my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) and the right hon. Member for Down, South—that this is an administrative problem. But it is not a problem of administration which the House will indefinitely tolerate remaining unsolved.

The Conservative Government attempted to produce an answer, but we found it difficult. The Financial Secretary may snort at that, but we have gone beyond the point of snorting or chuckling about this matter. No doubt he has the same unconvincing brief as his predecessors. We have gone beyond the point of the wringing of hands and saying that it cannot be done.

The method suggested by the hon. Member for Islington, South and Finsbury commands a great deal of respect. It appears to have greater simplicity than most others that have been offered, and it attacks the fundamentals by removing the week-by-week benefit which will accrue from the allowance when there is no taxable income coming in. If that does not work, surely it is worth looking at the alternatives again.

I understand that the Department of Health and Social Security's computer dealing with unemployment benefit is meant to be coming into service this year. If that is so, surely it is legitimate, in respect of unemployment benefit at least, to look again at the suggestion made many times of treating the DHSS as the employer for tax in respect of unemployment benefit. When the employee shifts from employment to unemployment benefit status, why should not the Department's computer embrace, as it were, the standard PAYE procedure which would have to be applied in relation to him if he had moved from, say, Unilever to ICI, from one tax-collecting employer to another?

Mr. Ralph Howell

All that needs to be done is that an emergency PAYE card be opened up for anyone sick or unemployed, and the amounts paid entered on to that emergency card as if he had changed jobs. It could be that simple.

Sir. G. Howe

My hon. Friend is representing the same point in a different way. The essential point is that on transfer from paid employment to the DHSS payroll, as it were, the man becomes treated for PAYE purposes. It is an alternative approach to that suggested by the hon. Member for Islington, South and Finsbury.

I understand that the computerisation of the sickness benefit system is more distant, and there is also the problem that in many cases the worker is effectively involved with two employers simultaneously. If he remains on the payroll of his original employer when he goes sick he draws sick pay in whole or in part from that employer and gets sickness benefit from the DHSS, so there are two, as it were, employers involved in paying him.

But I understand that arrangements are made, in that kind of situation, specially for those employed in the Civil Service which may point a way through on a wider basis. The normal pattern if one goes sick is that one claims the benefit from the DHSS and then receives one's pay, if one continues to be entitled to pay less the benefit, so that one's pay is made up in that way. Within the Civil Service, I understand, the person who goes sick continues to receive his full pay, and no benefit is claimed by him or on his behalf from the DHSS, but, because part of his income has become benefit which is not taxable, the tax taken from his total income is reduced to reflect the fact that he is getting benefit rather than wages. No doubt the paying department is reimbursed by the DHSS across the accounts. A complicated series of bookkeeping transactions takes place. That has the effect of raising the net take-home pay of the man when he is sick because part of his pay is no longer taxed. Apart from that, there is an inter-departmental book-keeping transaction.

10 p.m.

Why should we not apply that system, but at the same time apply the principle that the sick pay will itself be taxable? On that basis all that we would need to do would be to take out the rather curious step of reducing the PAYE payable on the income that the man is receiving while he is sick. What happens is that while he is sick his employing department continues to pay him full pay less tax in the ordinary way. There is no need for him to claim benefit because it is all subsumed in the system. There is no need for his tax liability to be reduced, because he is continuing to receive taxable income. There may or may not be a reimbursement between the DHSS and the CSD.

For those employed in the great chunk of the public service that are concerned with these transactions, once it is said that a man's sick benefit part of his remuneration in that period is taxable, there is virtually no change in the existing relationship. We have thus solved the problem in that sector. If it is possible to do that in that sector, surely it is possible to arrive at the same sort of arrangement with other large public sector employers, such as local government and nationalised industries, and many other large private sector employers, all of whom deal with their payroll on a computerised basis. We are achieving an extraction from the total pay that an employee receives through his employer when he goes sick to represent the continuing liability to income tax. It is a mechanical method that would seem to achieve that representation and reduce the scale of the rest of the problem to much more manageable proportions.

It would not seem impossible to devise, or at least consider, that system as yet another alternative. As the right hon. Member for Down, South said, it is scarcely credible that at this stage of sophistication of the computer it remains impossible to tackle the problem in the way that is suggested. I know that our experience with the Vehicle and Driver Licensing Centre at Swansea tends to make us less than exhilarated with new computer equipment, but that was a particularly unhappy experiment using equipment that was outdated when the operation started.

The Inland Revenue service in the United States, for example, is far more advanced with computerisation. It is moving into the second generation of computerisation. Many large industries in Britain and elsewhere are very far advanced in the computerised handling of the sort of data with which we are concerned. We are not dealing with complex data. It is difficult to believe that the problem remains insoluble.

The House cannot continue to be put off. It is a matter that requires the strongest possible new application of imagination and will within the administrative departments. It is astonishing to be told that tax revenue to the tune of half a billion pounds—as the hon. Member for Islington, South and Finsbury says, it could be used for the reduction of taxation or the dispersal of benefits, although we would argue about that —remains ungetatable in defiance of all the principles of equity and the original proposals set out in 1948 merely because of administrative reasons.

I hope that the Financial Secretary will give us the assurance that such authority is being put behind the tax collection system. It will be the task of some Government, and the sooner the better, to give the system that authority, that will and that imagination. The House demands it.

Mr. Robert Sheldon

The right hon. and learned Member for Surrey, East (Sir G. Howe) said that it was rare for the House of Commons as a body to call for tax to be imposed. That is true. I would point out that there have been a fair number of Tory Administrations since this problem first came to light. The failure of all Governments to come up with a method of implementing the will of the House and of the Government owes much to the problems of administration. I shall need to deal with that matter and with the general principle enunciated by the right hon. Member for Down, South (Mr. Powell), who compared two taxpayers in like situations and pointed out how one had certain advantages that were denied to the other. We have accepted the necessity in principle for taxing short-term benefits and we are concerned only with the problem of implementing this taxation.

Before going into these problems, I should like to deal with the point made by the hon. Member for Wolverhampton, South-West (Mr. Budgen) who put forward the argument—and argument that might be attractive to a number of hon. Members—that indexing was the solution.

Mr. Budgen

No. I said the opposite.

Mr. Sheldon

I misunderstood the hon. Gentleman. I understood the hon. Gentleman to argue—perhaps he will hear me and then correct me if I have his point wrong—that the failure to index the thresholds meant that the problems became greater than they otherwise would have been. Does the hon. Gentleman wish to intervene?

Mr. Budgen

I was referring not to the thresholds, but to the indexing of the benefits, and simply remarking that if we ever got back to stable money it would be unnecessary to index the benefits.

Mr. Sheldon

I think that there is common ground on this matter. The indexing of benefits is obviously less necessary when the rate of inflation is lower.

I think that we owe a great deal to my hon. Friend the Member for Islington South and Finsbury (Mr. Cunningham) who went into this matter with his usual extreme thoroughness. He had a number of conversations with me in the Treasury and elsewhere as well as with officials in an attempt to find a solution to the administrative difficulties. He made valuable contributions in debates in this House as a result of his examination of the problem. As a result of the extensive research that he undertook, he found, as the Treasury and I found, particular problems concerning the number of civil servants who would be required to operate a scheme and the methods by which the paper could be transferred from within the various parts of the Goverment machine to the relevant Departments.

I shall come on to the question of administration later. The main difference between my hon. Friend and myself is on the f50-million-cost-for-£500-million revenue argument. I do not know whether these figures have a close relationship to reality. I know that the estimates that we now have are a little more refined than those which I gave my hon. Friend when he was inquiring into this matter. We would need about 10,000 civil servants—fewer than my hon. Friend mentioned. He thought that the figure was inflated. If it was inflated by that amount, perhaps he was right. He considered that a good bargain.

With the problem of so many people moving from manufacturing into Government service generally, I view this matter with more trepidation than my hon. Friend. I see problems not only in the increase in the numbers of civil servants, but in the bureaucracy, which would be unjustifiable. I should be prepared to look at that matter if there were not other disadvantages, to which I shall come.

My hon. Friend mentioned that in Scotland there is the Centre 1 computer complex which makes possible certain operations which are not possible elsewhere. The taxation of short-term benefits is right in principle. I affirm that its administrative cost is high. The hon. Member for Cirencester and Tewkesbury (Mr. Ridley) mentioned the amounts of money that could be saved by taxing short-term benefits.

The right hon. and learned Member for Surrey, East (Sir G. Howe) dealt with the implications for civil servants. But the important distinction is that they retain the same jobs. There is an enormous variety of job changes and changing of addresses involving the different offices of the Departments of Employment, Social Security and the Inland Revenue. That gives one some indication of the enormous paper chase that is involved in any scheme that one can devise. Such a scheme would involve the social security office notifying the tax office of the number of weeks that each claimant received benefits. In general the claimants would be unlikely to assist because that would mean that they would have to pay tax.

Even if people were supposed to have a piece of paper before they received benefit, many people would not have that piece of paper. Even if they did have such a piece of paper, one would still be faced with the problem of the urgency with which they required the money to which they were entitled. Such matters are not sorted out quickly or easily. Most of us have had telephone calls at awkward times at the weekend as people try to make claims at short notice. If in addition to that one had to deal with the income tax office, a place that might be remote, before one could get one's money, additional problems would be caused.

Mr. Budgen

Does the Minister agree that the piece of paper to which he referred could be some form of identity card which could be used in many other transactions?

Mr. Sheldon

There are all sorts of ways in which bureaucracy could be more efficiently undertaken. Perhaps the House will in the future agree that there should be pieces of paper upon which many personal particulars appear. So far the House has not taken that view. I am not sure that it would approve of such a scheme if it were put to the House.

Mr. George Cunningham

Surely the piece of paper which most people have is the coding notice which has the address of the relevant tax office stamped upon it. If people were told "Produce that or you do not get your money" it would be found quickly. I put that starkly, and in fact one would not be as inhuman as that. One would have to stress more the importance of keeping the coding notice and of making this use of it. Surely that is a possibility. It is absurd that a member of the public should not be able to identify quickly from a document the tax office which is handling his affairs. He ought to know that for other reasons.

Mr. Sheldon

I agree that in many cases —perhaps in more than my hon. Friend suggests—such pieces of paper would be available. But in certain cases such a piece of paper would not show the amount of tax that was to be charged because it would not contain all the particulars.

The problem is—how do we withdraw the deduction equal to a fraction one divided by fifty-two? The easiest way is when the person returns to work. That would be when the deduction would be made, with the effect of high deductions on return to work. As the hon. Member for Cornwall, North (Mr. Pardoe) said it is not so attractive to return to work. But there are other problems. At a time when a person might be looking towards a resumption of his earnings, that will be denied to him.

10.15 p.m.

The major problem is that we need a new system. We have needed it for about 10 years. The Inland Revenue was well on the way to proceeding in this direction when the last Conservative Government started down the long road to tax credits. I note what the hon. Member for Norfolk, North said in that respect. Tax credits was the wrong road because it stopped the computerisation scheme. It was bad in itself for reasons that we amply demonstrated at the time, and it prevented the fundamental changes that we are now in the process of putting forward from being implemented. It created the extensive delay that we are now having to put right.

Mr. Ralph Howell

Why is it impossible for an emergency P45 to be issued with the amounts paid to the individual entered on it? The individual could take that back to his employer or to a new employer after sickness or unemployment. The Minister's arguments are invalid. I am sure that he accepts that. He has been brainwashed, as were the last Government, by Treasury officials into believing that it would take more people to operate this scheme. It would take considerably fewer.

Mr. Sheldon

I do not believe that people would come forward with these forms in the numbers envisaged by the hon. Member. There will be a large number of cases in which the forms will not be in the right place at the right time. Even if they were, there would still be a paper chase between the various departments, which could be at any location, and the tax office. There would still need to be a deduction and notification of that, and that would have to be done at sufficient speed to prevent any undue delay in the payment of benefits. That is the major problem to which the hon. Gentleman has not addressed himself. The point is that these people, needing money urgently, could not accept that kind of delay, which would arise even if the scheme were as watertight as the hon. Gentleman suggests.

Mr. Budgen

Will the Minister say whether any calculations have been made as to the amount of benefit paid out in response to fraudulent applications and which would be saved if everyone had to have the same piece of paper, as the right hon. Gentleman described it? I will not argue about the various types of pieces of paper. Surely that would be a major safeguard against fraudulent applications.

Mr. Sheldon

Obviously I have no such assessment here. I am not even sure that the scheme advanced by the hon. Gentleman would assist. There may be aspects of this matter which we do not have time to examine which might make fraudulent claims more likely. I do not know. Parliament is at one in wanting to continue the operation that the previous Government stopped. It is time that that operation was resumed. The Government last year undertook a full study of the requirements so that the design parameters for dealing with the problem could be set.

I accept the comparison that the right hon. and learned Member for Surrey, East makes between the computerisation of our taxation affairs and the position in the United States. That is certainly the road along which we wish to go. There is the allied question of self-assessment about which I have made announcements previously, but computerisation stands apart.

A number of suggestions have been made in the debate. I shall be very happy to examine a number of them to see what useful information can be extracted in order to bring about the better method of operation even by the setting of certain guidelines. However, I am unable to accept the clause.

Sir G. Howe

The Financial Secretary has talked about the impossibility of the scheme embodied in the new clause and has rehearsed the familiar reasons for its not being acceptable. He closed by saying that he would contemplate the design parameters, whatever that may mean, in order to resurrect whatever may have been going on before 1970 in the context of computerisation, which is certainly not likely to come before 1985.

Is that what the right hon. Gentleman regards as the full, sufficient and necessary answer to the debate tonight, as in years past—that we have to wait for computerisation to be carried through in the context of the new design parameters of which he spoke? Does he have no other solution to offer? If we are left as we were last year, waiting for the ful- filment of computerisation, it is a wholly unsatisfactory outcome.

Mr. Sheldon

I am sorry that the right hon. and learned Gentleman does not seem to have taken part in the debates last year when we explored the foothills, and perhaps even more as a result of the intervention of my hon. Friend the Member for Islington, South and Finsbury. There are these problems of the means of communicating a vast amount of information for large numbers of people, as well as the 10,000 civil servants whom we believe to be necessary.

If the right hon. and learned Gentleman questions that assessment, I take it that he is studying the matter, and I shall be pleased if he can find ways of reducing the number of civil servants so that the ratio is not, as my hon. Friend the Member for Islington, South and Finsbury suggests, £50 million to gain £500 million but is a better ratio. Would the right hon. and learned Gentleman go ahead on that sort of ratio? For my part, I would not. I would wish to have something far better. If the right hon. and learned Gentleman feels that that is a satisfactory ratio on which to commence operations, let him say so, so that the House will see where he stands.

Question put and negatived.