§ Question proposed, That the clause stand part of the Bill.
12.15 am§ Mr. Terry DavisI shall be grateful if the Financial Secretary to the Treasury will take this opportunity to reply to the point which I put to him on Second Reading and which he overlooked when he replied to that debate.
§ Mr. MooreI shall address myself to the clause and endeavour to deal with the specific matter which the hon. Member for Birmingham, Hodge Hill (Mr. Davis) raised on Second Reading. As most Ministers deal with many issues when replying to a debate, I cannot remember the specific one that he raised. I have no doubt that the hon. Gentleman will seek to intervene again in the debate to remind me what it was. If he does so, I shall endeavour to reply. If I cannot do so adequately tonight, I shall seek later to convey the information to him.
I realise that we must be considering the Finance Bill and that it must be May, because we are still at it, as it were, at 15 minutes past midnight. I have no doubt that we are all quite comfortable in Committee terms.
Clause 40 seeks to provide tax relief for the self-employed on one half of their class 4 national insurance contributions. The relief will be given as a deduction in computing total income. This means that it will be allowed after the profits on which class 4 contributions are based are worked out, and so will not in turn affect the amount of the contribution. The Committee will be interested to 742 know that about 1.1 million self-employed will benefit from the relief. It will be given at the taxpayer's marginal rate so that, where he is liable at higher rates, relief will be given at his highest rate. For someone liable for the maximum class 4 contribution for 1985–86 of £607, and paying tax at 60 per cent., the benefit will be £182. I have details of particular examples which the hon. Member for Hodge Hill used on a previous occasion, but he may prefer me not to go into them in detail as they prove his points and mine as well. However, I should be only too happy to go into details if he wished me to do so.
The change will provide a substantial boost to the self-employed and underlines the importance which the Government attach to this part of the economy. The majority of our smallest businesses are in the self-employed sector and it is from here that we see an increasing proportion of lasting jobs. The number of self-employed has increased by nearly one third since 1979.
This is but one of many measures which the Government have taken to help small businesses. Apart from the changes in national insurance contributions in the Budget, the income tax thresholds have been increased and capital gains tax retirement relief is being extended. We shall probably be discussing later the extension of that relief. Most recently, the report entitled "Burdens on Businesses" identified the priority areas for reducing the burden of regulation. The report is being followed up urgently.
Previously, the self-employed have not been entitled to set any part of their national insurance contributions against tax. In law these contributions count as a personal, not a business, expense. This contrasts with the position on class 1 contributions, where the employer's share of the contributions payable in respect of his employees has always been tax deductible as a business expense. The self-employed have long argued to both sides of the House of Commons that part of their contributions should be similarly allowable. The Government are persuaded of the rightness of their case and the clause remedies what many of us see as a long-held grievance. I trust that both sides of the Committee will support the clause.
§ Mr. Terry DavisI had hoped that we might make rapid progress and, therefore, I made only a brief opening contribution. It is clear that the Minister has missed the point that I made on Second Reading. I shall repeat it, because I am sure that he will try to reply to it this evening rather than engage in correspondence, if only to save us debating the clause again on Report.
As the Minister has noted, the benefit of the arrangement is much more for someone on very high earnings. For someone who receives more than £45,000 a year, the benefit of tax relief on class 4 contributions amounts to £182 a year. However, the benefit for someone at the top end of the band earning £13,780 is only £91 a year. The Financial Secretary has used those figures.
On Second Reading, I asked the Government why they had chosen to reduce the classable contributions paid by the self-employed as they have done. There are two ways in which they can be reduced. The Government have chosen to allow tax relief on half of the contributions. On Second Reading, I told the Financial Secretary that the same effect could be achieved for most self-employed people by reducing the amount of the contribution from 6.3 to 5.3 per cent. That would provide exactly the same amount of money to a self-employed person earning 743 between £4,150 and £13,780 a year and mean that someone who earned £45,000 a year would still benefit to the tune of only £91 a year from the reduction in class 4 contributions.
We see no justification for giving tax relief on class 4 national insurance contributions, thus providing twice as much money for the person who earns £45,000 a year as for the person who earns £14,000 a year. that is not soley a matter of equity; cost is also involved. the Government's choice involves more paperwork for the self-employed person, because that person must claim tax relief in the tax return. It also involves more work for the Inland Revenue. The Financial Secretary is nodding, so I must be right.
The Treasury has admitted in a press release that the Government's preferred method will involve a significant increase in the number of people employed by the Inland Revenue. I thought that the Government wanted to reduce the number of civil servants, but they have chosen a method that is inequitable and involves the employment of more people at tax offices—they will employ more people to be unfair.
I have heard somewhere that what the Government describe as a significant increase in staff in the Inland Revenue will come to about 50. They are to be employed, not to collect extra revenue, but to distribute this largesse to the self-employed. That is strange behaviour for the Government, especially when we are told that they have had to shelve plans to mount an assault on the so-called black economy by employing people to counter tax evasion, which would involve the creation of 42 new posts. The Government say that they cannot afford 42 people to deal with some of the most serious aspects of tax evasion, and yet they can employ more than 50 people to ensure that people who receive more than £45,000 a year get an extra £182 as compared with £91 for those who earn just less than £14,000. I had hoped that the Financial Secretary would be able to justify the cost of that inequity. I hope that he will do so now.
§ Mr. MooreWhen he wound up the debate on Second Reading the hon. Member for Hodge Hill made many points, and I was not sure to which matter he was referring. As I did not want to delay us I did not want to go into detail, but I am delighted to do so now. So that I can be complete in my coverage, I shall try to cover all the points that he made.
I refer, first, to the principle. I see the hon. Gentleman's point. However, with respect, in this instance there is a confusion in the arguments that he is advancing because we are seeking to give the self-employed a similar tax relief to that which the employer has in relation to a part of his contribution. Simply reducing the rate of class 4 instead of giving tax relief would not bring the tax treatment on to a fairer basis. A cut in the class 4 rate would be at odds with the contributory principle under which the self-employed must broadly pay their way for the benefits they receive.
We are not in dispute about the facts. The hon. Gentleman is right about the extent to which those on a higher income will benefit more than those on a lower income, but there is a ceiling. The maximum benefit is about £182, against the £607 potential maximum total contribution, compared with a benefit of only £90 in the case that he illustrated.
744 On Second Reading the hon. Gentleman went into considerable detail about a person with profits of only £100 a week. I would not challenge any of the facts. He rightly suggested that that person would save only 19p per week. It is important to view that in relation to the saving against the amount of his class 4 contribution as well, because it is the combined package that someone in that category will see is he is considering his position of self-employment. As the hon. Gentleman knows, class 4 is calculated on an annual basis. On profits of £5,200—£100 a week—the figure comes out at £1.27 per week, and 19p represents a 15 per cent. reduction. If the contribution is small, the tax savings must also be small, by definition. The saving is much more significant if the reduction in class 2 of £1.25 is included. On the combined class 2—class 4, the person might now pay £6.02 per week. Under the proposals in the clause and the class 2 national insurance changes, he would pay £4.58 per week, a reduction of £1.44, or approximately 24 per cent. I accept that it is not a massive reduction in money terms, but it is significant in proportionate terms.
On Second Reading the hon. Gentleman went into detail on the potential additional paperwork, and referred to cash flow implications. I shall refer to that too, for completeness. There will be next to no extra work for small business men. As the hon. Gentleman was right to say, it is the inspector who calculates the class 4 contributions by reference to the business profits. It is he who will calculate and allow the class 4 tax relief. There will not be a cash flow effect. Class 4 is charged on the income tax assessment on the profits of the business, and is payable in two bites, in January and July, along with the tax on those profits. In the vast majority of cases the class 4 relief will be given in that tax assessment. Thus, by the time the business man pays his tax and class 4, his tax bill will have been reduced to reflect the class 4 relief. The reduction in class 4 itself would not come through earlier.
The hon. Gentleman was right to say that there would be additional staff. One should put it in proportion, but he is right, and it is an important point. The additional Inland Revenue manpower cost of administering the relief is estimated at 60 to 70 units.
I apologise if I did not cover all the points initially. I trust that I have done so now.
§ Mr. Terry DavisI readily accept the Financial Secretary's most courteous correction of my point about cash flow. Since our debate on Second Reading I have done some more homework and realised that I exaggerated the argument.
With regard to the benefit to a self-employed person paying class 4 contributions, I stand by what I said.
The Financial Secretary referred to the point that I made on Second Reading about 19p a week, but that was a separate issue. I was commenting on the progressive nature of these contributions—a point covered by the Chief Secretary in that and other debates. He said that it was inevitable in any increase in allowances. We disagree with the Government about increases in tax allowance being a way to deal with the poverty trap, because it benefits people on the highest marginal rates of tax.
12.30 am
I shall concentrate on the inequity of giving £182 to the self-employed person who receives £45,000 a year, but only £91 to the person who receives £14,000 a year. To do that, the Inland Revenue proposes to employ between 745 60 and 70 extra staff. I am delighted to receive the Financial Secretary's assurance that there will not be any extra paperwork for the taxpayer, but it is bad news for the taxpayer that he will have to pay more for the extra staff to calculate this tax relief, when it could be done without any extra staff, if only the Financial Secretary would agree to reduce the rate of contribution from 6.3 to 5.3 per cent., and concede the Labour party's point about equity at the same time, because that would be the inevitable consequence of doing it in the way that we have suggested.
The Financial Secretary was himself mistaken at one point, when he said that it is important to maintain the contribution at 6.4 per cent. for class 4 contributions because of the benefits to which the self-employed person is entitled. I was not present when class 4 contributions were introduced by the Labour Government, but I know that they brought no increased entitlement to the self-employed. They were a method of ensuring that the self-employed person paid a fair proportion of the cost of social security. His rights and entitlements were not extended. Those entitlements all depend on class 2 contributions, so the Financial Secretary needs to do a little more homework on this subject.
The Opposition stand by what we said. The Government cannot afford to employ 30 people to counter the most serious aspects of tax evasion, but they can employ more than 60 people to ensure that people of very high incomes receive larger amounts than they would from the reduction in class 4 contributions.
§ Question put and agreed to.
§ Clause 40 ordered to stand part of the Bill.