MARRIED COUPLE'S ALLOWANCE

HC Deb 08 May 1991 vol 190 cc783-92

Mr. Chris Smith (Islington, South and Finsbury)

I beg to move amendment No. 18, in page 15, line 40, at end insert— '(3) Subsection (2) of section 257B of that Act shall cease to have effect after the year 1990–91; subsection (1) shall have effect for 1991–92 and subsequent years as if it read (1) Where a man is entitled to relief under section 257A for any year of assessment, he may transfer to his wife the whole or any part of the relief to which he is so entitled; and where such a transfer is effected, he shall cease to be entitled to a deduction from his total income for that year of the amount transferred and his wife shall be entitled to a deduction from her total income for that year of that amount"; and subsection (3) shall have effect for 1991–92 and subsequent years as if after "relates", there were added (aa) shall specify the amount of relief which is to be transferred to his wife.".'. Clause 21 freezes the married couple's allowance at the current level of £1,720 per year for the financial year 1991–92. Only last June, the then Chancellor of the Exchequer, who is now Prime Minister and who I suspect exerted some influence over the contents of the Bill before us, said in a speech to Welsh Conservatives that Labour's proposals in relation to the allowance were especially malign, and reserved for special attack and venom any proposal to freeze it.

Ten months later, the self-same Government, now led by the self-same person, are proposing precisely to freeze the married couple's allowance. It therefore comes as something of a surprise to my right hon. and hon. Friends and myself to find that a Government who were excoriating such a proposal only a few months ago are now including it in the Finance Bill.

The married couple's allowance should really be called the married man's allowance in another guise. Under section 257(1)(a) of the Income and Corporation Taxes Act 1988, which was brought in as part of the Finance Bill 1988, the allowance initially goes to the husband and can only be transferred to his spouse with his consent. Even then, only that part of the allowance that the husband himself cannot use may be transferred—only that portion that he cannot set against his own taxable income. The transfer of the allowance from the husband to the wife can be done only in very limited circumstances, where the husband's taxable income is not sufficient for him to be able to make use of the allowance in its entirety.

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That makes a mockery of any pretence that there is independent taxation of husbands and wives. It makes a mockery also of the allowance's description as a married couple's allowance. It is directed primarily—and for the majority of taxpayers, entirely—at the husband and not at the couple. That can lead to discrimination against the wife in cases where there is no specific agreement between the couple as to who might make best use of the allowance.

The allowance may also discriminate against a couple where different rates of marginal tax are paid by the husband and the wife. If the wife is paying at a higher rate than the husband, yet it is only he who can offset the married couple's allowance against income, the couple will lose, whereas they would not if the wife could offset at least part of the allowance against her income.

The current operation of the married couple's allowance is not good for equity, fairness, or the dignity of wives in the taxation system. Independent taxation is a mirage. For three years in succession, we have sought to press on the Government a change in the way in which that allowance is applied.

Mr. Tim Smith

How can the hon. Gentleman assert that independent taxation is a mirage when, for the first time, married women are being sent tax returns?

Mr. Smith

That may be so, but most married women still cannot make any use of the married couple's allowance, which makes nonsense of any claim of truly independent taxation.

We acknowledge that an amendment that sought to put into effect the full import of our proposals would not be in order. In an ideal world, we would like to see the married couple offered a choice of how they apportioned their allowance. If they wanted to apportion it entirely in the name of the husband, or in that of the wife, or if they preferred to split it in any way between them, they would be able to choose to do so.

Failing agreement between the two parties about the proportion that should go to each, we should like an automatic equal apportionment between them. That would be a sensible approach, which would preserve the principles of independence and would benefit a small number of people who are disadvantaged by the way in which the present system operates.

However, within the terms of the Bill we cannot frame an amendment to put that into operation, because it would increase the tax liability of a limited number of men, and it would therefore be out of order within the terms of this Committee. Therefore, we have drafted what I would describe as a second-best proposal, which forms the content of amendment No. 18.

The amendment goes some way to redress the problem of the present married couple's allowance and would allow it to be freely transferable, with the husband's agreement, whether he could have used it or not. That is the key change as, at present, it is freely transferable from husband to wife only with the husband's consent and if he is unable to make use of it. We are lifting that restriction. Under this amendment, if the husband wished—whether or not he were able to use the allowance—it would be possible for him to transfer it to his wife. That is fairer than the present position, and that is why we have tabled the amendment.

Having explained why we tabled the amendment, two further matters arise in connection with this amendment and this clause which ought to be named. First, when the Chancellor announced in the Budget that he was going to freeze the married couple's allowance for this year, he said that he would use the money to extend other forms of support to families and children. more should be done to help families with children. I propose to use the resources released by not increasing the married couple's allowance for that purpose."—[Official Report, 19 March 1991; Vol. 188, c. 179.] Note carefully the words: use the resources released by not increasing the married couple's allowance. That brings £360 million in revenue to the Exchequer in 1991–92. In 1992–93, it will bring in £490 million.

In return, the Chancellor made some modest increases in child benefit, but they amounted to a cost of £220 million only to the Exchequer, which leaves a substantial surplus of revenues from the freezing of the married couple's allowance.

As far as I can tell, those substantial extra revenues have fallen into a black hole, and have not been used for child or family support. The Chancellor should have used the entirety of the money that the Exchequer raised by freezing the married couple's allowance to support families with children in other ways. We have long held the view that support for child benefit is by far the most effective means of targeting help to families with children.

It is sad that the Chancellor did not live up to his statement in the Budget and use the entirety of the revenue open to the Exchequer as a result of that change to help families with children. He should have done so, he said he was going to do so, but he did not. That is a failure on his part. Later, it would be useful to hear from the Minister of State what will be done with the extra money which falls to the Exchequer as a result of this clause.

I mentioned child benefit, and it is important to view the measures in this clause and the proposal contained in our amendment against the background of what is happening to that benefit. It is a tax-free cash benefit, paid per child, per week, directly to the person responsible for the child or children—usually directly to the mother. It was introduced in 1977, replacing child tax allowance and family allowance. Child benefit is universal, and is paid regardless of income or capital.

In Britain, 6.7 million families receive child benefit for 12 million children, at an annual cost to the Exchequer of £4.6 billion. The take-up rate is 98 per cent. Quite clearly, it is the best way to assist families on low incomes with children.

Child benefit was frozen at £7.25 per week in September 1987 by the then Chancellor, the right hon. Member for Blaby (Mr. Lawson), until April 1991, when the Government granted a £1 per week increase to the first child, taking the benefit for them to £8.25 per week. The rate for subsequent children remains frozen at £7.25 until October of this year.

In his Budget statement in March 1991, the Chancellor announced that the rate for the first child would increase by another £1 to £9.25 in October. The rate for subsequent children would increase by a miserable 25p per child.

In his Budget statement, the Chancellor also promised to start uprating child benefit in line with inflation from April 1992. However, child benefit is still below what it should have been if it had been uprated in line with price increases since April 1987, when it was frozen. If that had been the case, the value of child benefit for each and every child would now be £9.55 per child per week. Even for the first child, the value is short of that amount from October this year, and the value for subsequent children is substantially short of the amount that it should have been.

One of the immediate acts of a Labour Government will be to fulfil our pledge to uprate child benefit in full to the value to which it ought to have been uprated to account for the rise in prices since 1987. That would be a more substantial way to assist families with children than anything that the Government have done in recent months or years, even after considering the repentance in the Budget and in the Chancellor's statement.

The Government are accruing extra income to the Exchequer by the change that they are making in clause 21. They are not devoting the entirety of that income to the purpose for which it was supposed to be used. They are using only a portion of it to increase child benefit, and they could have used more.

In tabling the amendment, we are doing two things. First, we are drawing attention to the inadequacies of the present arrangement for the use of the married couple's allowance, and to the unfairness of that arrangement; we are seeking to make it fairer, and to offer couples at least some choice in how the allowance is apportioned. Secondly, we are drawing attention to the fact that the Government should be offering families with children much more support. In freezing child benefit and then neglecting to uprate it properly, the Government have failed Britain's families. Opposition Members will continue to remind them of that during the coming weeks and months.

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Mr. A. J. Beith (Berwick-upon-Tweed)

I shall be brief, because I know that the Minister of State wishes to speak. Let me put it on record, however, that my party shares the objectives of Labour's amendment—and shares even more emphatically those of the amendment that Labour Members would have tabled had that been in order. Indeed, we tabled such an amendment; and it is intriguing to note that an amendment along the same lines was debated last year, but somehow slipped through the net. The objective that we share is, of course, to make independent taxation genuinely independent.

Mr. Nicholas Brown

I know that the hon. Gentleman has strong views about whether amendments are in order. Given what he said to my hon. Friend the Member for Derby, South (Mrs. Beckett) in yesterday's debate, I hope that he will make fulsome apologies for having enabled an amendment that was out of order to be deemed in order last year. The strictures that he applied to the Opposition were, after all, very severe.

Mr. Beith

I shall do nothing of the sort. It was Labour's amendment that was found to be in order last year, and it is the Labour amendment that has turned out to be out of order this year. I shall not stray too far from the subject of our present debate; let me point out, however, that my criticism last night related not to whether the amendment was technically in order, but to the confusion that was apparent in the setting out of its objectives. It also related to the failure of the hon. Member for Derby, South (Mrs. Beckett)—the spokesman for the official Opposition—to explain how her party could achieve two objectives at once without adding up the cost of both.

Happily, that does not apply to amendment No. 18. We agree—I hope—that we want to secure genuinely independent taxation that will not depend on the husband's choosing to transfer allowance that he does not require, but will allow each partner to obtain the maximum benefit from his or her share. The current procedures do not allow that. As the arguments advanced in support of them have been largely technical, I should like to think that the Government really wish to achieve the objective of the amendment, and that they will continue to try to do so. Indeed, I rather hope that the Minister of State—who, I am sure, takes a personal interest in the matter—will tell us that the Government are still trying to achieve that aim of genuinely independent taxation and genuinely divisible married couple's allowance.

I am glad that you called me before you called the Minister of State, Mr. McWilliam, because I want to underline the question put by the hon. Member for Islington, South and Finsbury (Mr. Smith): what is the future of the married couple's allowance? Do the Government intend to phase it out and let it wither on the vine by not increasing it in line with inflation year by year; or is that simply a short-term treatment?

The failure to index the allowance has released considerable sums, more of which could have been devoted to child benefit. Is it the Government's policy to use more and more of the savings obtained from not indexing the married couple's allowance to fund child benefit improvements? If it is, we can support them in that objective, but so far the position is unclear. The Minister would do us a service if she set out the Government's policy on both the future of the married couple's allowance and the extent to which the savings to the Exchequer will be devoted to child benefit. She should also continue to try to find a mechanism to achieve the objective of the amendment.

Mr. John Battle (Leeds, West)

I wish to make a small but, I hope, important point about child benefit and about whether people will actually receive the proposed increase.

On Second Reading, the Chief Secretary to the Treasury said: perception is lagging behind reality".—[Official Report, 30 April 1991; Vol. 190, c. 179.] I sometimes feel like turning that phrase the other way round, and suggesting that reality—in terms of tax and benefits—often lags behind public perceptions.

Many people believe, deep down, that they will receive £140 off their next poll tax bill when it arrives some time in June, as a result of the proposed changes. In fact, we know that that applies to only 40 per cent. of people; but that did not prevent Conservative candidates in the local elections from putting out leaflets suggesting that every person in the country would receive a cheque for that amount, as if it would be signed by the Secretary of State for the Environment himself.

That is manifestly not the truth; and exactly the same is happening in regard to child benefit. When we consider one benefit, we must also consider its interaction with others. The increase in child benefit has been sold as a great bonus; the brakes are off and, we are told, every family will gain. Will the Minister confirm, however, that the effect of that increase will be rubbed out by the impact of the Government's freezing of single-parent benefit? Lone parents must be among the poorest groups in our society, especially when they have no opportunity to work—or, if they have, can work only in part-time and, usually, low-paid work. Some must stay at home with their children. When the freezing of the single-parent benefit is put together with the increase in child benefit, the result will be that such people will not receive the extra money that the Government are promising.

This is another classic case of the Government's giving out what they nowadays call a "headline" figure—that usually means a figure that they hope will make the headlines in a newspaper or on television—which does not represent money in people's pockets. What has been given with one hand has, effectively, been taken away with the other.

If the Government had done the decent thing, they would have uprated child benefit properly. Then we would not have had to witness the farce of the Government's playing with the language in the last Conservative manifesto, in which we were told that the benefit would be uprated "as now". That meant that it would remain "as now" on the day of the last general election. No uprating took place until the public put pressure on the Government to take the brakes off and begin to uprate the benefit in line with inflation—and they are not there yet.

I hope that, next time, the Government's promises will be listened to carefully. What has happened to child benefit is, in my view, an illustration of what the Government do. They make a promise and wrap it up in language, and people think that they will receive the money; but, when they work out the details, they find that they have been short-changed.

The Minister of State, Treasury (Mrs. Gillian Shephard)

I appreciate the aims of the amendment—and those of the "non-amendment", if I may use EC parlance. I must admit that I have some sympathy with those aims. The amendment is similar in some respects to one that was considered in Committee last year. My right hon. Friend the present Chancellor of the Exchequer expressed his sympathy with what that amendment sought to achieve, but felt unable to accept it and others because, in his view, the benefit would not be commensurate with the cost. The hon. Member for Islington, South and Finsbury (Mr. Smith) has given some idea of what his amendment aims to achieve and of the complications that might ensue.

There were three reasons for my right hon. Friend's decision last year. I think that it is worth repeating them, because they apply, to a greater or lesser extent, to any proposal to make the present arrangements more flexible. My right hon. Friend said that the present straightforward system might he made more complex. He did not want many more people to have to fill in tax returns, and to have to deal with the Inland Revenue, which would place increased burdens on both sides. He also felt that there should be no reduction in the privacy that husbands and wives enjoy under the present system

The amendment that we are discussing raises similar concerns. The concerns might not matter and the cost might be worthwhile if many people were better off as a result. But the amendment would not have that effect because it would enable fewer than 50,000 people, or about 1 per cent. of the total, to arrange their tax affairs in such a way as to reduce the wife's higher rate tax liability. No other couples would be better off in cash terms as a result of the new transfer option offered by the amendment.

It is possible for a husband and wife to run their financial affairs separately now. That is why we were the first Government to treat a married woman as a fully independent taxpayer under the new system of independent taxation. I realise that, although a couple might not benefit financially from being able to split the married couple's allowance, they might consider it the right thing to do as a matter of principle. That point was made in the amendment and by the hon. Member for Berwick-upon-Tweed (Mr. Beith).

In considering the present amendment we have to look at the principle—which I agree is important—and the practicalities. I believe that the considerations are outweighed by the practical disadvantages of the proposed amendment. The main advantage of the present system is that it ensures that the married couple's allowance is given initially to the partner who is most likely to be able to use it effectively—the husband. That minimises the need for transfer, so it is a cost-efficient way of giving relief to married couples. Of course that is not popular with everyone. Some people do not like it because they would gain more by a different set of rules and others do not approve of it as a matter of principle.

I assure the Committee that the Government have considered carefully on several occasions various options for making the rules more flexible for transferring the allowance. However, we have always come up against the fact that the benefits to be gained from a change are not sufficient to justify the upheaval.

Last year my right hon. Friend the Chancellor of the Exchequer explained some of the disadvantages of that option. I shall briefly repeat his explanation. Eighty per cent. of taxpayers are dealt with through pay-as-you-earn. The amendment would entail moving away from a system whereby 80 per cent. of these taxpayers do not make tax returns and do not deal with the Inland Revenue but are covered by PAYE. From a practical point of view the amendment could be regarded as a retrograde step. If the amendment were accepted, married couples would have to be informed about the new options and given the opportunity to choose them. The Inland Revenue would have to ensure that the husband's and wife's tax offices, which deal with each other only occasionally under independent taxation, made the necessary adjustments to their records. Procedures would have to be set up to deal with couples who wanted to change their decision later because during the year their income turned out to be more or less than they had expected. That would carry a cost in extra staff and extra worry about the options for millions of married couples whose tax affairs are now straightforward.

Although the amendment is not exactly the same as those that were tabled last year, the intention is the same, and I must reach the same conclusion as my right hon. Friend did last year. I certainly admit quite freely that the present system is not perfect, but in practical terms it is the best possible solution.

The hon. Member for Islington, South and Finsbury raised some specific matters including the apparent discrepancy of £140 million between the yield from freezing the married couples' allowance and what is being spent on the increase in child benefit from October this year.

I know that the hon. Member for Leeds, West (Mr. Battle) will understand that the social security system is a great ship of the state and it takes time to get new systems into place and that 7 October is the earliest date on which the additional increases in child benefit can be paid. There is generally a six-month lead time before social security changes can be implemented and from that day all families with children will receive a further £1 a week for the first eligible child and 25p a week for subsequent children. To that extent, the hon. Member for Islington, South and Finsbury is correct that there is a discrepancy of £140 million, but I ask him to regard the Budget as a total package. Of course the £140 million is within all the measures included in this year's Budget. Next year, however, the cost of introducing the increases in child benefit will be accounted for by freezing the married couples' allowance. I ask the hon. Gentleman to accept that, here again, there was a practical difficulty.

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The hon. Member for Berwick-upon-Tweed asked about the Government's future intentions for the married couple's allowance. He asked whether the freeze was the first step towards its abolition. He reads far too much into a decision that was taken in an economic situation which called for a tight Budget this year to direct scarce resources towards families with children. It reflects the Chancellor's priorities this year. As the hon. Gentleman knows, all the allowances are reviewed each year in the run up to the Budget and considered in the light of the economic circumstance then prevailing.

The hon. Member for Leeds, West asked about the freeze on one-parent benefit. Lone parents already have the £1 increase in child benefit for the first child. One-parent benefit has been frozen, but that freeze is fully offset in income support. The level of one-parent benefit is subject to review by my right hon. Friend the Secretary of State for Social Security each year. The hon. Gentleman will understand that, although it is a matter for my right hon. Friend the Secretary of State for Social Security, important improvements for lone parents are on the way in the child support Bill which will come to the House next month.

The hon. Members for Islington, South and Finsbury and for Leeds, West asked about the freezing of child benefit in the past. I remind them and the Committee that the resources from the freezing of child benefit were used for other social security priorities. Annual spending on poorer families has increased by £500 million since 1988 and the resources released by the freezing of child benefit during that period were in part directed to helping poorer pensioners.

Mr. Battle

Is it not true that the increase in money to the poorest was used in housing benefit as their rent went up, so in effect it was a subsidy to the housing system?

Mrs. Shephard

No, I do not agree with that. The hon. Gentleman knows perfectly well that there were enhanced arrangements for people on income support and family credit which accounted in part for the £500 million. I remind him that the overall spending on families with children is higher now than it would have been had child benefit been regularly uprated since 1988. As we have been talking about the prosperity of families, I remind the Committee that the take-home pay of families on half the average wage has gone up by 29 per cent. under the present Government compared with 4.2 per cent. under Labour and that of the average family with two children has gone up by nearly 37 per cent. compared with a measly 0.6 per cent. under Labour. I think that families know where their best interests lie.

Mr. Chris Smith

I should begin by welcoming the Minister of State to our proceedings on the Finance Bill as the clause that we are discussing is her first segment of the Bill. I also welcome some of her remarks. She said that she had some sympathy with the aims of our amendment, that she regarded the principle enshrined in it as important and that only practicalities outweighed it in her mind. In another part of her speech, she said, quite correctly, that the present married couples' allowance system is not perfect.

I welcome all those statements. It is a pity that, although the Government support the principle of making the married couples' allowance a joint decision between husband and wife rather than an automatic accretion to the husband's tax relief, they do not carry their sympathy into legislation.

The Minister of State said that the cost next year of the commitment to child benefit would use up more of the amount raised by freezing the married couple's allowance,

I do not think that it would use up all of it. If I am incorrect, I shall happily give way to the Minister. The figures in the Red Book do not seem to indicate that, even then, it would use up all of it.

Mrs. Shephard

The hon. Gentleman is right to say that there is a minor difference between the two figures. I say "minor" within the context of the Government's whole public expenditure budget, which is enormous—amounting to some £50 million. Given that we are talking about next year, and given the difficulty of predicting the number of children who will qualify for child benefit, the discrepancy should be regarded as just that. It may be ironed out by the birth rate next year.

Mr. Smith

I am glad that the Minister of State confirms that there will be a shortfall in the use of the money for child benefit next year. Although £50 million may be a minor amount in terms of the overall public budget, I should prefer it if £50 million had been used to support children through child benefit rather than simply being swallowed up by the Exchequer.

The Minister of State also argued that our amendment, which would allow the husband to transfer the married couples' allowance to the wife if he so wished, would benefit financially only 1 per cent. of tax-paying couples. I accept that only a small number of people would benefit financially from such an arrangement, but the point of the amendment is that not only financial benefit but the principle of choice is at stake. A couple should jointly determine what happens rather than having the Exchequer determine by fiat that the whole amount will go to the husband. The amendment is not just about financial gain but is about equity of treatment between husband and wife within the taxation system.

We believe that the principles that we have adumbrated in relation to the amendment and the clause still stand. The Government's praying in aid of practical difficulties has not stopped them dreaming up systems of local government finance and all sorts of other mechanisms to penalise people. Praying in aid practicalities in defence of doing nothing on a basic principle that is right does not wash. However, because of the Bill's strictures, we could not put forward in its entirety the proposal that we should have liked to make on the married couples' allowance. Our amendment is therefore very much second best, and although it would be a small step in the right direction, it would not be right to push it to a vote. However, I hope that we can return to the matter on a future occasion. Therefore, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 21 ordered to stand part of the Bill.