Tax Credits Bill

HL Deb 12 April 1999 vol 599 cc506-70

3.4 p.m.

The Parliamentary Under-Secretary of State, Department of Social Security (Baroness Hollis of Heigham)

My Lords, I beg to move that this Bill be now read a second time.

Noble Lords will be aware of the proposed introduction of working families' tax credit and disabled persons tax credit. The Chancellor of the Exchequer made the announcement in another place on 17th March 1998 and noble Lords had an earlier opportunity to debate some of the broad policy principles during the passage of the Tax Credits (Initial Expenditure) Act 1998. That Act gave authority to the Inland Revenue and the Department of Social Security to spend money and begin work on the development of the tax credits to build on and replace two existing benefits, family credit and disability working allowance.

A joint project—with the Inland Revenue and the Benefits Agency—has been set up to implement the proposals and the Inland Revenue has held extensive consultations with representative groups to develop the details of the scheme. It has also been working closely with other government departments, such as the DSS and the Department for Education and Employment.

Those two introductory paragraphs I had estimated might be coterminous with the departure of most of your Lordships from the House. I now turn to the substance of the Bill which provides for the introduction of tax credits, their administration by the Inland Revenue and for them to be paid through the pay packet. It may be helpful if I spend some time sketching in the background to their introduction.

First, perhaps I may say something about labour market trends. Since the objective of full employment was first set out in 1944 there have been major demographic and social changes affecting the labour market and the global economy and a rise in female and in part-time employment. Over the past 20 years in particular, structural unemployment has been on an upward trend, accompanied by the wide swings in the level of employment which go with the boom and bust economic cycle. The labour market participation rates of certain groups of individuals, including men aged over 50—particularly those with poor skills—lone parents and disabled people have all declined substantially, and the number of households where no one is in work has risen dramatically. The problem is particularly acute among families with children and is a major factor in child poverty.

The build up of long-term worklessness associated with previous recessions has proved immensely damaging for individuals, destroying their connections with the labour market, their skills and their employability. It has meant that, as the economy began to move into recovery, the upturn was cut off by labour market bottlenecks, by skill shortages and wage inflation while at the same time worklessness remained at unacceptable levels. So the challenge facing the Government is to promote employment opportunity for all in the very different labour market of today.

What are the obstacles to work? Lack of work is the most important pathway into poverty and work is the best way out. Most of those with low incomes are poor because no one in their household has paid work. But also, one in five low income households remains stuck on a low income even though all the working age adults in their household are in work. For those who are trying to move into work, or trying to move up the employment ladder, there are two major problems. I am sure your Lordships will be familiar with both. They are the unemployment trap and the poverty trap.

People are understandably reluctant to take work that does not pay, even though they remain strongly attached to the labour market. Too often, the gap between in-work and out-of-work income is too small to encourage people to move off benefits—the unemployment trap. And, once in work, many people on low income face an unacceptable poverty trap in which improvements in their pay are clawed back by the combined effects of the tax and benefit system. It means that they may be paying almost penal rates of deduction. Those distortions are frustrating the ambitions of people on low income and contributing to family poverty. They also contribute to high levels of structural unemployment and low levels of labour market participation. Measures to address tax and benefit distortions are therefore an important element of the Government's economic programme as well as a crucial element of the reform of the welfare state. We are determined to make work pay by tackling those obstacles—the unemployment trap and the poverty trap—to moving into work, staying in work and moving onwards.

Since 1979 the number of non-pensioner families—that is, families of working age—living in workless households has more than doubled as households have polarised between "work rich", where more than one person is in work, usually a husband and wife, and "work poor" households where no adult is in work. In 1995–96, eight out of 10 working age households with less than half average income—almost 8 million people—had no full-time worker, up from five in 10 (in 1979) to eight in 10. A third of children, as a result, now live in relative poverty. That is almost 3 million more poor children than in 1979. Over 80 per cent. of those children live in families where no one has a full-time job. Over 80 per cent. of workless households are dependent on benefit; that rises to over 90 per cent. of workless households where there is a couple with children. It has led not only to worklessness and relative poverty, but also to greater income inequality.

As I said earlier, the unemployment trap occurs where net income after taxes and in-work benefits is little or no better than income out of work. Such low returns from working reflect partly the low level of entry wages that some people are able to obtain: entry wages are on average only two-thirds of the median wage for the job. For someone falling out of work but then returning, it takes on average four years to recover the level of pay that that person received when he or she dropped out of work. Yet research shows that it is the entry wage, not the wage that people may receive four or six years on, that determines people's perception of the financial returns from entering work. A survey of the barriers to moving into work based on people on income support indicated that the biggest single reason why people were reluctant to move from income support into work was the low level of entry wages. Over a third of those questioned cited that as the reason—twice as many as cited the lack of affordable childcare, for example.

But for some, particularly those with large families, the financial gains from working can be small even at moderate earnings. The tax and benefits system plays a key role here. The severity of the unemployment trap depends primarily on a combination of two factors. The first is the generosity of out-of-work benefits, which reflect family size—unlike wages—and which erode the return from work, particularly for those in a large family. The other is the wages that can be obtained from working plus the generosity of in-work benefits, which will increase the return from work. The position of the unemployment trap is on the fulcrum between those two.

The poverty trap arises when people in work cannot improve their net income significantly by increasing their pay because that is largely offset by income tax and particularly withdrawal of in-work benefit. Whereas higher in-work benefits improve the unemployment trap—that is, they make it more attractive to work— they tend to make the poverty trap worse because they mean more families receiving those benefits and hence facing high withdrawal rates.

For those with sufficient income or hours to take them off JSA or IS, the return from further increases in earnings can be reduced by national insurance contributions, income tax, the progressive withdrawal of family credit, housing benefit and council tax benefit. The overall size of the marginal deduction rate facing a low earner depends on which benefits are being received, but it can rise to 97 per cent. for those who are also on family credit, housing benefit and council tax benefit, as well as paying NICs and tax. Because withdrawal of benefits is calculated on the basis of income after tax and other benefits, the overall rate cannot normally exceed 100 per cent., but at certain points it can go higher where both housing benefit and council tax benefit are being withdrawn. People are actually worse off for every extra pound they earn. Surely that must be perverse.

Marginal rates for low earners tend to be higher for those with children, because they may then be affected by the withdrawal of family credit, or those with high rents and/or council tax, because they may then be affected by the withdrawal of housing benefit or council tax benefit. About three-quarters of a million working families, about 5 per cent. of the total, have marginal rates of 70 per cent. or more currently. That is approximately twice the number that existed in the mid-1980s. That is in part a result of the previous administration's decision to move away from investing in social housing and instead to deregulate housing rents, which therefore went up. Housing benefit took the strain, thus increasing that dependency trap by thousands. Absurdly, nearly half of those on family credit, 45 per cent.—500,000 people—also pay income tax, even though their hourly rate may be below the minimum wage. So we pay in-work benefits to subsidise unacceptably low pay, and we then proceed to tax part of those in-work value benefits away. Can there be a better argument for the integration of tax and benefit structures? Under WFTC, 97 per cent. of those families, the 500,000 who are being taxed on their benefits, will be taken out of tax altogether.

I now turn to the working families' tax credit. Last year, the Chancellor of the Exchequer signalled a major step towards overcoming the twin obstacles of the poverty trap and the unemployment trap. He announced the introduction of the working families' tax credit to replace family credit to ensure that work is rewarded and not penalised. Its greater generosity helps to spring both the unemployment trap and the poverty trap. It makes it attractive to move into work and it allows people to keep more of their pay as they go up the earnings scale because the tapers are more shallow.

Combined with the national minimum wage and changes to NICs, the WFTC will provide a minimal level of weekly take-home pay. The WFTC, which will be introduced on 5th October 1999, will provide a guaranteed minimum income of £200 for families. with one member in full-time work earning the national minimum wage and reduce the tax burden on families so that those with earnings of less than £235 a week, or £12,000 a year, will no longer pay any net tax; it will reduce the number of people with marginal tax rates of over 70 per cent. by 500,000; it will provide the opportunity to develop greater support for the costs of childcare; and the disabled person's tax credit will also provide a guaranteed minimum income of at least £155 a week for a single disabled person who moves from benefit to full-time work earning the national minimum wage, and £230 for a couple with one earner and one child.

The Tax Credits Bill legislates to convert the existing benefits into the new, more generous tax credits. It sets out the framework within which the tax credits will operate. The Bill builds on the existing legislation for the benefits which are being replaced. It provides that the main features of family credit and disability working allowance will apply to WFTC and DPTC, and that the functions of the Secretary of State are transferred to either the Treasury or the Inland Revenue.

Much of the detail of the existing benefits is in secondary legislation. The Bill therefore includes a large number of existing regulation-making powers, where the details of the scheme will be set out. It adds few new regulatory powers. Rather it re-establishes the existing powers of family credit and transfers them to WFTC. The Bill also contains consequential provisions to establish the administration of the tax credits by the Inland Revenue.

Much of the detail of the scheme and that for payment through the pay packet has already appeared in the booklet, Working Families Tax Credit and Disabled Person's Tax Credit, published last December and in the draft regulations published for debate in the other place.

It may be helpful if at this point I explain how the tax credits will work. In October 1999 WFTC and DPTC will begin and will be administered by the Inland Revenue. Applications for the tax credits will be made to the Inland Revenue at the new tax credit unit. It will asses and pay the award.

WFTC will be available to families who have one or more children living with them, who work at least 16 hours a week, are resident in the United Kingdom and have savings of less than £8,000. The qualifications for DPTC are similar, except that applicants must have savings of less than £16,000, and they do not need to be looking after a child. To qualify for DWA they must have one of a number of qualifying disability benefits or have been receiving one up to 56 days prior to their application. But the Bill extends this period to six months. I shall return to that later.

The WFTC will include one adult credit per family—it is a household credit—while the rate of DPTC adult credit will depend on whether the applicant is single or a member of a couple. The distinction is that the credit is by definition of the disability as opposed to the family. Both WFTC and DPTC will also include child credits, depending on the number and age of the children, a 30-hour credit, as now with family credit, and a childcare tax credit. The DPTC will in addition include a disabled child's tax credit. The total amount of WFTC or DPTC for which a family qualifies is calculated by adding together the appropriate tax credits.

The full amount of WFTC will be available to those whose income net of tax and NICs is below £90 per week. If net income is above £90, the maximum WFTC is reduced by 55p for each additional £1, not 70p as now under family credit. The full amount of DPTC is available to a single person whose income net of tax and NICs is below £70 per week and to a couple or lone parent whose net income is below £90 per week. Above those amounts the taper is reduced by 55p for every extra £1 of income.

Compared with family credit, the credits under WFTC and DPTC are more generous, the threshold is higher and the taper of withdrawal is more gentle. Once the weekly amount of tax credit payable has been awarded, it will normally be fixed for 26 weeks, as with family credit now. Couples applying for WFTC will be able to choose which partner applies for and receives the tax credit—a point worth emphasising. Awards will be paid to the applicant by automatic credit transfer into the applicant's bank account or, if the applicant chooses, by order books.

As I have mentioned, the tax credits also include a childcare tax credit. This will be more generous than the childcare disregard in family credit which it replaces and will assist the poorest families. Under family credit a family earning less than the threshold of £79 a week cannot, in practice, obtain help with childcare costs because it is already receiving maximum family credit and therefore the disregard of childcare costs cannot come into play. With working families' tax credit, the credit effectively reimburses 70 per cent. of what is paid out for assisted childcare, so the poorest stand to gain. The credit will play a key role in underpinning the national childcare strategy by ensuring that good quality childcare is affordable for low and middle-income families.

We have therefore decided to raise the age limits applicable under family credit so that parents will be able to claim for childcare for children up to the age of 14, ensuring that the credit is in line with the national childcare strategy. We all know that children of 12 and 13 need supervision as much as younger children. We shall also raise further the age limit in the case of children with a disability so that their parents will be able to claim childcare costs up to the age of 16 and extend the range of childcare costs which can qualify for the tax credit to cater better for good quality out-of-school provision needed for older age-group children, the 8 year-olds plus.

We have also proposed that in calculating income for WFTC purposes there will be full disregard for maintenance payments, something I am very pleased about. That will be a significant contribution towards tackling child poverty. At the moment a lone parent on family credit keeps only the first £15 of the maintenance and thereafter it is netted off the family credit. In future she—it is usually she—will keep every penny, on average, over £30 or £31. Children will see their fathers directly paying maintenance for their upkeep and the family and the children will be better off.

Finally, we have also recognised that one of the problems with moving into work is the financial uncertainty between losing income support and the start of wage payments. To help ease the transition for lone parents, the Chancellor announced in his Budget that from October 1999 their out-of-work income support will be extended for two weeks—a fortnight's roll-over—when they move into employment. As IS and jobseekers' allowance are often paid up to two weeks in arrears, this will effectively allow up to four weeks' roll-over of IS or JSA alongside the existing four weeks' roll-over of housing benefit and CTB. This, too, will smooth the move into work. Many people have told us that it is the first month, before they receive wages and when they have lost benefit, that is the hardest to cope with.

The disabled person's tax credit will replace the DWA. It will be more generous than the benefit it replaces, with increases in the thresholds and a more gentle taper. There are many experts on disability in this House, some of whom I see here today. They will know what the flaws with disability working allowance have proved to be. It does little to help people who become disabled while working to stay in work, despite all the evidence showing that unless a disabled person stays with his or her existing employer it is most unlikely that another employer will employ him or her. Nor has it been as successful as anticipated—and we all hoped it would be successful—in encouraging people to move from out-of-work benefits into work. When it was first introduced we expected that around 50,000 disabled people would claim it. The figure has climbed very slowly to about 14,000, only a quarter of those whom we hoped would be eligible.

What are we going to do about DWA? To address the first point, the Government propose creating a fast-track gateway to the disabled person's tax credit. This will be for people who have been on statutory sick pay or equivalent benefits for 20 weeks and who are therefore effectively still employed by their employer, who can show that their condition will represent an obstacle to their participation in the labour market for the next six months and who face a drop in income from returning to work. In other words, we are effectively constructing a partial capacity benefit for those in work whose earnings will fall by virtue of their disability while they remain with the same employer. This seems to me an important move in allowing disabled people to remain in work, with more flexible working conditions. We shall bring forward any necessary new clauses at Committee stage.

To tackle the second problem with DWA and to get people who are out of work into work, as opposed to keeping them in work, we propose two new measures. The first is to use the qualifying benefit rule. At present, to be eligible for DWA a claimant must either be claiming disability living allowance or have claimed incapacity benefit within the past 56 days. However, 56 days may not be long enough for someone to find a job whose entitlement to incapacity benefit has been withdrawn because of improvements in his or her condition but who is still at a disadvantage in the labour market. We are therefore extending that period to six months.

Secondly, we are extending the housing benefit and council tax roll-over, which applies to income support but not to disability benefits, to disabled people. In addition, noble Lords will recall that last October the 12-month linking rule came into effect, which means that if a disabled person on a fairly high level of benefit—because it is long-term benefit—takes the risk of going into work, should that work break down, he or she can go hack on to the higher level benefits rather than go back down the snake and have to start all over again. This linking rule takes away some of the risk that disabled people perceive in leaving secure benefits and trying out work.

Putting those three measures together—the fast-track procedure, the roll-over, and the 12-month linking rule—we believe that we shall not only be able to help disabled people remain in work but also help them to move into work more speedily.

From April 2000 WFTC and DPTC will become payable to employees by their employer in their pay packet. Self-employed applicants will continue to be paid direct by the Revenue, as will couples who have opted for the tax credits to be paid to a partner who does not have an employer. As with the general scheme, draft regulations for the scheme for payment by employers have been published for debate. These proposals have been developed over several months in full consultation with representative bodies. We wish to pay tax credits through the pay packet to cement the link between work and the rewards of work.

After April 2000 all claims will still be made to the Inland Revenue, who will assess the award. If, however, the tax credit is to be paid through an employer, the Inland Revenue will notify the employer of the amount of tax credit to be paid, when to start payments and when to stop. The employer will add the amount of the tax credit to the employee's net pay for each pay period. I emphasise that the Inland Revenue will do all the work of calculation. The employer will need only to add the sum notified to the pay packet. That amount will be shown on the employee's payslip. This stage of tax credits will inevitably involve some changes for employers, including the need to ensure that their systems are able to make the payments and account for them to the Inland Revenue. In its consultations with employer and other business representatives the Revenue has been discussing the design of the scheme to ensure that any extra costs are kept to a minimum. A draft regulatory impact assessment has been published along with the draft regulations I mentioned.

Employers will pay tax credits out of the PAYE tax and NIC deducted from their workforce with additional funding from the Inland Revenue if necessary. However, some employers will not be asked to pay tax credits through the payroll where they do not currently deduct PAYE tax or NICs as they will not have any money with which to pay it. In those cases employers will not pay tax credits; their employees will receive it direct from the Inland Revenue.

That is a broad summary of the tax credit scheme. There will be some specific additional powers. There is a provision to bring the tax credits under the care and management of the Board of Inland Revenue and include within them the duty of confidentiality. There are measures to ensure security to combat fraud. There is also protection of employees' rights to ensure that they do not suffer unfair dismissal as outlined in Schedule 3 at the hands of unscrupulous employers. The Bill also allows for any necessary exchange of information between the Inland Revenue and the DSS to carry on the business of tax credits and remaining social security benefits.

Appeals about tax credit claims will he heard by the new unified appeal tribunals set up under the Social Security Act which your Lordships debated last year. That is because these tribunals will have the experience, for example in assessing disability, to deal with the type of cases that come before them. In the longer term we intend to pass jurisdiction to the tax commissioners so that they hear all appeals on tax credits. WFTC and DPTC are to be excepted matters for Northern Ireland and outside the legislative competence of the Assembly because they are part of the Inland Revenue's UK-wide tax system.

These are the main provisions of the Bill. I hope that the House will forgive me for taking some time to explain this technical matter. The Bill when enacted will allow for the introduction of a system that provides much needed help to low income families and disabled people. It will give real financial encouragement for them to move into work by significantly boosting their earnings and providing extra help with childcare costs. It will unambiguously improve the rewards from work by providing a clear link with employment. It addresses the unemployment trap; in other words, one is better off working. It also addresses the poverty trap because one keeps more money as one's earnings increase. It combines making work pay with supporting families who re-enter work, and it will help to lift them and their children out of poverty. I commend the Bill to the House.

Moved, That the Bill be now read a second time.—(Baroness Hollis of Heigham.)

3.33 p.m.

Lord Higgins

My Lords, as in previous debates relating to social security the House will be grateful for the very clear exposition by the noble Baroness of an extremely complex Bill and of the even more complex subject with which it seeks to deal. But whatever the Government's original intention—I believe we can all agree that the need to tackle the unemployment and poverty traps is of great importance—in very many respects this Bill is a bad and disappointing one. In some ways, it is a wasted opportunity. The reality is that this is not a tax credits Bill. If it were such a Bill, I should certainly be among those who welcomed it enthusiastically.

Over the years a vast number of attempts have been made to integrate the tax and benefits system to overcome the problems to which the noble Baroness referred. To go back into ancient history, as long ago as 1974 the then government announced that they intended to introduce a tax credits Bill to integrate the two sides. They recognised that they could not afford to do so immediately, but they said that they intended to legislate and to introduce such a Bill over four years. Alas, the general election of 1974 intervened. A committee was then set up comprising three people: the noble Baroness, Lady Castle, the noble Lord, Lord Barnett, and one other whose name for the moment eludes me. At all events, the opportunity was lost. I have never managed to discover why that government turned down that idea. Over time, everyone has wanted to see this idea achieved.

However, this Bill is not a tax credits Bill. I have tried to think of alternative titles. I forget whether the title of a Bill can be amended in your Lordships House. This measure is that most improbable animal—an Inland Revenue hand-out Bill. That gives one grave cause for concern. Even the title is wrong. Clauses 1 and 2 immediately give the game away. Under Clause 1 certain benefits are to be known as "tax credits". Spin-doctoring is all very well but to legislate to make one word mean what is normally regarded as something quite different is extraordinary. Clause 2 is concerned with the transfer of functions relating to tax credits. If it really were a tax credits Bill, there would be no need to transfer this matter to the Inland Revenue.

Very disappointingly, as the Government's ideas on this subject have changed, the Bill has itself changed very significantly. The idea was originally put forward by, among others, Mr. Martin Taylor who was looking at the issue. It was discovered that the Inland Revenue did not believe that it was possible to integrate this matter with the PAYE system. As a result, instead of going back to the very beginning, the Government have proceeded with this rather extraordinary proposal whereby the working family's tax credit and the associated credits will effectively be disbursed by the Inland Revenue. Although we are told that it is a flagship, in many respects it is a vessel that is sailing under false colours.

We shall do everything that we can to improve the Bill—and there are many respects in which the Bill can be improved, not least because interests as wide-ranging as the Institute of Directors and the CBI on the one hand and the TUC on the other have objected to some features of the Bill. Further, those groups which are most closely involved in this area, such as the Child Poverty Action Group and the National Association of Citizens Advice Bureaux, have also raised very considerable doubts. Perhaps I may quote the NACAB. Although it welcomes the increased expenditure, it is by no means certain that the problems intrinsic to a means tested wage subsidy help to solve the poverty and unemployment traps to which the noble Baroness referred. On the contrary, it is fearful that it will make some of those problems worse rather than better.

I list some of those matters that I believe are objectionable. For some noble Lords who take part in social security debates a number of these matters will appear almost traditional. First, the Treasury appears to be taking over more and more of the responsibilities of the Department of Social Security. Following the transfer of the Contributions Agency, we have the Bill that is now before us.

Secondly, in line with other moves by the Government, means-testing has been increased. This Bill brings into the dependency net many people who previously were not within it, although the avowed intention of the Prime Minister before the general election was that the Government would reduce the extent to which people became dependent on the social security system.

Next, there is the promise to reduce the expenditure of the Department of Social Security. In the Comprehensive Spending Review we see a massive increase in that expenditure. As far as concerns this Bill, the figure involved is about £1.5 billion. It may be even higher following the recent Budget Statement by the Chancellor. Therefore, we face a very real problem.

From the Government's presentational point of view, the picture is rather advantageous. On the one hand, this can be presented in some ways as a tax cut and, on the other hand, as a reduction in the expenditure of the Department of Social Security.

In addition, there are all of the usual problems relating to the matter being dealt with by regulation. Will we have before Committee stage drafts of all the regulations that the Minister envisages being introduced? With particular regard to the childcare tax credit, which was introduced only at the very last minute in the other place, will we have the guidelines that will tell us whether or not a particular arrangement for childcare will qualify for benefit?

The Bill raises a number of more specific problems, particularly that which is commonly called the "purse-to-wallet problem". Grave concerns have been expressed outside that instead of benefits being paid, generally, to the wife, there will be a choice. The couple will have to choose who should receive the benefit—and that may give rise to some dispute. The noble Baroness raises her eyebrows. I do not find that a remarkable suggestion. It would seem that instead of family credit being paid to the wife, under the Bill on some occasions it may not be. Is it common ground between us that it is better that family benefit should be paid to the wife rather than to the husband? Research by Rowntree and others suggests that when it is paid to the mother, it is more likely to be spent on the child. Perhaps the Minister will clarify whether or not that is common ground.

Outside bodies have also raised problems in respect of fraud. The Government have made a great thing about tackling fraud, despite in some cases apparently withdrawing the mechanism for dealing with it. I shall not dwell on the problems now. My noble friend Lord Astor of Hever will deal with them in some depth.

Problems surrounding confidentiality have also been stressed by outside groups. Also, there cannot be any dispute about the fact that there will be problems concerning the burden on business. They will have to be discussed at a later stage.

All those problems will require a great deal of attention in Committee, on Report and at Third Reading. In addition, we have the Government's proposals for the childcare tax credit and the disabled person's tax credit—remarkably, an issue that there was no opportunity to discuss in Committee in another place. That is an extraordinary situation and it places an additional burden on your Lordships. The Minister indicates dissent, but it presents your Lordships with an additional set of problems, which must be discussed in considerable detail.

I have already stressed the problems surrounding means testing and marginal tax rates, to which the noble Baroness referred. One must, of course, take the withdrawal of benefits into account as well as whatever the tax rate may be. Am I right in thinking that although it is true that the Bill reduces the number of families paying a high marginal tax rate, it increases the number who will pay tax at 60 per cent.? Perhaps the Minister will clarify that point. She stressed strongly that was something she saw as a virtue of the Bill.

The cost to the Exchequer will be considerable—something like £1.5 billion, which is carefully disguised in the Treasury documents as accounting and other adjustments. Has the basis on which that was put in the Red Book been approved by the impartial bodies that normally do that? It has enabled the Government to present their public expenditure and tax plans in a more favourable light than reality would justify.

My next point arises, rather cogently, from the quotation that I used a moment ago from the NACAB, which called the Bill's proposals a means-tested wage subsidy. That is a rather unusual device, but it is the reality of what is proposed in the Bill. Is that in conformity with European Union law? If it is a subsidy of that kind, other countries might feel that it is unfair competition.

I turn to the centrepiece of the Bill. The Government's whole argument is that, as they were not able to do this through PAYE, the benefit must be paid through the payroll so that people understand that they get more from working than from being on benefits. I find it strange that the Government feel that people who go to work and suddenly find that they are receiving additional benefits will not realise that is the reason, but be that as it may. The choice as to how the credit is to be paid will apparently be available to couples but not lone parents who—whether they like it or not—will have the benefit paid through the payroll. Couples may decide whether to have it paid in that way or through the post office. The Government say that they cannot do that for lone parents because they would not realise that they are gaining from working.

The TUC seems to share my view that such an arrangement is most unfair on lone parents, who will be denied that choice. Of course the argument cuts both ways. If the Government give people the choice, our argument against the credit being paid through the payroll is somewhat diminished. Conversely, the Government's argument the other way is rather better. The National Council for One Parent Families also sees that as a problem. Perhaps the Minister will make clear exactly what the situation is and why lone parents should be deprived of that choice.

I referred to the wallet to "purse-to-wallet" argument, which I believe is likely to cause problems. No doubt we shall return to that point in Committee and at later stages. Much of the argument is that tax credits are much better than existing family benefit because there will be much less stigma attached. One would have thought that that was reflected, at least to some extent, in the degree to which a particular benefit is taken up. I believe it is common ground that 72 per cent. of family credit is taken up—or 85 per cent. if one calculates it on an expenditure basis—and that 91 per cent. is taken up as far as lone parents are concerned. It was suggested in another place that take-up reflected need rather than a feeling that there was some stigma attached. We know that the need may be equally great among some pensioners on income support, yet that has no way near the take-up rate of family credit. Does the Minister expect the take-up rate to be significantly higher under the new arrangement? If so, how much higher than 91 per cent. so far as lone parents are concerned?

There are real problems in respect of confidentiality. Despite the Government's denial in another place, one is receiving representations that there will be real problems if payments are made through the pay packet. The CAB points out that the employer paying the tax credit will know whether the employee has other jobs. If that is not true, no doubt we can exchange views and the Minister will be able to set our mind at rest. Groups at the forefront in helping people to deal with a highly complex social security and tax system are under the impression that the employer will know whether or not the employee has another job.

Baroness Knight of Collingtree

My Lords, before the noble Lord leaves that point, can he press the matter a little further? How can the employer pay out the money if the employee has other employers about whom he does not know? The second employer might consider that it was up to him to make the payment because he did not know that the employee had another employer or employers.

Baroness Hollis of Heigham

My Lords, the employer does not do the calculation; the Inland Revenue does. The sum of money that the employer attaches to the payslip may change because the employee has another job; is paid more or less for childcare; or his partner has acquired a new job, left her job, or moved away. Any circumstance could alter the amount that the Inland Revenue will ask him to attach to the pay packet. It will be virtually impossible for the employer to calculate the reason for changing the payment made.

Lord Higgins

My Lords, we shall be able to pursue these matters. I have sympathy with the view expressed by my noble friend. There are real problems. It is not clear, for example, how much each of the employers will pay. The revenue will say that one employer pays so much, and another employer pays so much. Perhaps the Minister will clarify the issue. Will it all be paid by one employer? I gather that it will. That will be a surprise to the other employer who will suddenly find that the individual he thought had children will not receive money for them. We need to go into the matter in Committee.

I turn to the burden on business. The Chartered Institute of Taxation has expressed views on the issue. It takes a different view from that expressed by the noble Baroness. However, perhaps the Minister can tell us the estimate she has made of the additional cost to business as regards the start-up situation and recurring costs. No doubt other Members will wish to raise other points on the issue.

On the cash flow, in her opening remarks the Minister said that the Inland Revenue will tell the employer how much to pay out and the employer will pay it out. Where is the money coming from in the meantime; and how is the employer—it may be a small company with serious cash-flow problems—to know how much his cash flow will be affected by the change?

I turn to the two issues which were not discussed in Committee in the House of Commons: the childcare tax credit and the disabled person's tax credit. As the Minister said, the proposal is that the benefit should be raised to cover children not only up to eight, but from eight to 14, or up to 16 as regards the disabled. The clause originally missing from the Bill has now appeared, I think, as Clause 15. It aims to create a category of good quality providers. The House of Commons was told that the draft regulations will be considered in this House. I am not clear whether they have yet arrived. They are among the regulations that we shall need to study very carefully indeed. We shall also need to study the guidelines which will decide whether an arrangement whereby family A looks after the children of family B, and family B the children of family A, will be eligible. When the Inland Revenue gave evidence to the Select Committee it was unable to express a view on the subject. We shall need to consider carefully those guidelines.

The estimates of cost vary. The Government's estimate is £200 million; the Institute of Fiscal Studies estimates £4 billion. That seems a rather large margin of error. We shall need to clarify the likely real cost. Perhaps the Minister will give us an up-to-date estimate when she winds up.

Finally, like the noble Baroness, I speak with great diffidence on the disabled person's tax credit because of the expertise which noble Lords have on the subject. We shall need to consider carefully the way the proposal is likely to operate in practice. We must all hope that the disabled person's tax credit works in the way the Government intend.

I have a specific question for the Minister. No answer was forthcoming in another place as to the position concerning some passported benefits—childcare tax credit, prescription charges and the provision of free school meals. Since by now the Government have surely made up their minds on the issue—it seems extraordinary that they did not do so during the Bill's passage through another place—we shall be grateful to have a clear answer from the noble Baroness to put minds at rest. Some are worried that as a result of the change in structure benefits they previously received will be no longer available to them.

I apologise for speaking at such length, but it is an important Bill. It was advertised (if that is the right expression) as the Government's flagship Bill in this area. We must see to what extent some of the problems can be dealt with during the Bill's passage through this House. I see no reason why change should not be made on a number of issues. It will then be a significantly better Bill.

3.57 p.m.

Lord Goodhart

My Lords, I am sorry that we are not providing from these Benches a speaker to wind up. My noble friend Lord Russell was due to do so but he is unwell today and we did not feel that it was fair to ask anyone else to deal at only a few hours' notice with complex issues with which he or she is not familiar.

The purpose of the Bill is to convert family credit into the working families' tax credit and the disability working allowance into the disabled person's tax credit. I intend to say nothing about the disabled person's tax credit because it will be taken up by very few people. I understand that only 16,000 people now receive it; and that number is expected to increase only by some 10 or 15 per cent. as a result of the changes which are now being introduced. However, the criticisms of the working families' tax credit which I shall develop later in my speech will apply in many cases also to the disabled person's tax credit.

My honourable friend, Professor Steven Webb, made a series of powerful criticisms of the Bill in another place. He spoke as an expert in the field. I am not an expert, but I shall try to follow him as far as I can. In doing so I have to warn your Lordships that my speech will be lengthy and somewhat heavy going; or, to be rather more blunt, long and boring.

Family credit has proved to be a useful mechanism for relieving poverty among low paid workers and families. It has a high take up rate. The noble Lord, Lord Higgins, gave the statistics. The take up in terms of the amount claimed is 82 per cent. of the theoretical maximum; which is 91 per cent. in the case of lone parents. That indicates that the majority of cases in which the benefit is not taken up are those in which the amount is small. The Government are now converting family credit into working families' tax credit. However, much of what they are doing could be done under existing rule-making powers.

Let us look at the main changes. First, we welcome the generous increase in child tax credit for children under the age of 11. Secondly, the small increase in the basic tax credit, but still well above inflation, is also welcome. Thirdly, the cost of childcare by registered childminders is converted from a disregard into a tax credit and the upper limit on the maximum costs of childcare is substantially increased. We welcome that, too. Fourthly, there is an increased threshold before the taper starts. We welcome that. Fifthly, the taper rate is reduced from 70 per cent. to 55 per cent. With reservations, we welcome that. All those changes could have been brought about by changes in the regulations without new legislation giving a new name to an old benefit.

So what does the Bill do? First, in Clause 1 it renames family credit as working families' tax credit. Secondly, in Clauses 2 to 5 it transfers the responsibility for the administration of working families' tax credit from the Department of Social Security to the Inland Revenue. That is also dealt with in a number of clauses dealing with consequential issues such as inspection powers and penalties. Thirdly, in Clauses 6 and 7 it provides for working families' tax credit to be paid through the pay packet instead of to the airing parent. Finally, in Clause 15 it provides for a new category of persons who can provide childcare qualifying for credit.

Perhaps I may begin by going back to the parts of the new system that are not dealt with in the Bill. As I said, we welcome the increases in child tax credit for under 11s and in the basic tax credit and the increase in the threshold. We also welcome the more generous treatment of childcare costs. The present figures are not generous enough to make it practicable for most single parents to work if they have to rely on paid childcare. There is a big improvement there.

The taper creates problems—tapers always do. If there is a steep taper, it creates a benefit trap because the increase in gross earnings gives very little extra money in the pocket. If there is a gentle taper, the cost to the taxpayer is higher; more people are brought into means-tested benefits; and money is given to people who really do not need it. The result of reducing the taper and of the improved childcare costs is that a family with five children and maximum childcare costs could receive working families' tax credit on a gross family income of up to £38,000. That is not a wholly unlikely situation. Quite a number of people have five children and if both parents are working they will certainly need childcare! The result will be a small but significant number of people paying the higher rate tax and receiving the working families' tax credit. That is an absurdity.

The scheme is potentially very expensive. As the noble Lord, Lord Higgins, said, the Institute for Fiscal Studies has estimated the extra cost of childcare credit to government at up to £4 billion. That is a maximum and assumes that all claimants switch from informal or parental care to registered childcare. Of course, that is unlikely to happen. Even so, it is likely that childcare will be very expensive. It is not clear that the scheme provides tight enough control on childcare tax credit. Is there anything in the present rules to prevent two mothers registering as childminders and looking after each other's children?

I believe that the working families' tax credit will have to be modified quite soon to make it less expensive. One possibility might be to retain a higher rate of taper on the childcare element in the working families' tax credit in order to avoid it becoming a subsidy to childcare for the middle-classes. But that is not a matter covered by the Bill.

I now turn to the Bill. The Minister introduced it with her usual persuasiveness. However, I believe that almost everything in it is wrong. The name change is cosmetic. I agree with the noble Lord, Lord Higgins, that it is a benefit and not a genuine tax credit. It will be paid to some who pay no tax or national insurance. It will also exceed the tax and national insurance liability of the recipients. I understand from debates in Committee in the other place that the Government accept that the working families' tax credit will count as public expenditure and will not be treated as a reduction in taxation. I would welcome confirmation of that.

I turn to Clauses 2 to 5 relating to the transfer of responsibility from the DSS to the Treasury or the Inland Revenue. I believe that is wrong. A few weeks ago, we debated in this House the Social Security Contributions (Transfer of Functions, etc.) Bill. That transferred the responsibility for the collection of national insurance contributions from the DSS to the Inland Revenue. I firmly believed that that was correct and we warmly supported it. However, in my view, this transfer is wrong. The administration of the working families' tax credit should remain the responsibility of the DSS. The kind of issues involved in income support and working families' tax credit are often identical. For example, regulations under Section 136 of the Social Security Contributions and Benefits Act 1992 define how income and capital are to be calculated. They also provide for the income and capital of a claimant's family to be treated as the income of the claimant.

It is desirable, as far as possible, that the rules for different benefits should be similar so that not everything needs to be recalculated when claimants switch from one benefit to another. In future, the regulations for income support will be made by the DSS and the regulations for working families' tax credit will be made by the Treasury. Presumably officials from each department will have to meet and agree two sets of regulations in the same form. It seems to me more efficient to handle both sets of regulations in the same department. Decisions on the right to working families' tax credit, or the amount of credit payable, will be taken by officers of the Inland Revenue. Those decisions are entirely different from the decisions now taken by them, but they are exactly the same as the decisions taken by officers of the DSS. They should remain with officers of the DSS.

I understand that the family credit unit is to be transferred en bloc from the Benefits Agency to the Inland Revenue, but that simply means that they are being moved to the wrong place. Appeals will rightly remain with the DSS and go to the social security tribunals and not to the commissioners of income tax. I was sorry to hear the noble Baroness say that the Government intended in the longer run to transfer that jurisdiction to the income tax commissioners. The administration is going to the wrong bodies in order to try to give credence to the illusion that working families' tax credit is not a benefit.

I shall turn shortly to the "jewel in the crown" of the Bill; that is, the payment through employers. However, before doing so I wish to raise a couple of other points. The first was raised by the noble Lord, Lord Higgins: the passporting of welfare benefits such as exemption from prescription charges. Recipients of family credit were passported. Clearly, the Government cannot passport all recipients of working families' tax credit, some of whom will pay the higher rate tax. Where and how will they draw the line?

Secondly, have the Government considered integrating a housing element into the working families' tax credit? The present system has two drawbacks. Mortgage interest payments are met for those on income support but not on family credit and will not be met for those receiving working families' tax credit. That is therefore a disincentive for those on income support to take work. Furthermore, the withdrawal of housing benefit and council tax benefit may leave recipients of the working families' tax credit facing very high taper rates, even after the reduction in the taper of the working families' tax credit on its own. For people paying tax and national insurance contributions and receiving family tax credit, housing benefit and council tax benefit, the marginal rate resulting from the change to working families' tax credit will be reduced only from 96.9 per cent. to 95.3 per cent.

I turn now to what I call the jewel in the crown, the payment through employers. There are disadvantages for both employers and employees, and it confers no advantages that I can see on the Revenue. There will be extra costs of more communication with employers and certainly no cost saving for the Revenue. There will certainly be disadvantages for employers.

The costs were estimated in the draft impact assessment at just over £100 million per annum recurring, with start-up costs of approximately £40 million. The draft impact statement states that the aggregate cost for small employers in the category of those who employ between one and four employees will be £24 million. It then states that averaged over all employers in this category, of whom there are 670,000, it works out at £37 per employer, which does not seem very much. Mathematically, that is no doubt correct, but the impact statement also says that only 10 per cent. of employers in this category, that is those employing one to four employees, are likely to pay working families' tax credit through the payroll in any year.

As the compliance costs for those who do not do that are obviously nil, it means that the compliance costs for the 10 per cent. who pay will be not £37 but £370 each. The noble Baroness shakes her head, but this is something that causes me some puzzlement because that is the clear inference from the impact statement, and no doubt this is a matter that she can take up in reply.

There is no proposal here to refund administration costs to employers, as there is with statutory maternity pay, and that is the position despite a recommendation by the Social Security Select Committee that there should be reimbursement of these administration costs.

Perhaps even worse is the nuisance factor for small businesses. It may not matter for a business large enough to employ a book-keeper or accountant, but for a small employer, let us say the farmer employing two or three people, it means more time sitting at the kitchen table and filling in the paperwork in the evening. Small employers will not like it. This is particularly true where the amount of working families' tax credit exceeds the employer's liability for tax and national insurance contributions. That of course is a problem that is especially likely to affect small employers in industries such as agriculture or catering. Regulations will provide for advance payment to the employer, but this involves more bureaucracy.

Small employers will be reluctant to employ workers who are claiming working families' tax credit. The Government know that; why else have they felt the need to give employees specific rights under Schedule 3 to the Bill to complain to an employment tribunal that they have suffered a detriment because they are entitled to a tax credit?

If many employers are reluctant to take on employees on working families' tax credit, one likely consequence is that some employers will deliberately target them by exploiting their difficulty in other jobs and paying them the lowest wages they can get away with.

There is, I believe, an overwhelming case for giving small employers the right to opt out of payment of the working families' tax credit or, better still, exempting them.

What about the employees? Here, we get into the purse and wallet argument. The Government have moved some way to recognising this argument. The proposed arrangements mean that both parents must consent to the payment going to one parent or the other. That opens up the prospect of consent obtained by intimidation, which of course is not possible now. In addition, if the Inland Revenue receives an application form signed by only one partner it will have to conduct intrusive investigation to find out whether the absence of the other partner's signature is due to an oversight, as will probably be the situation in most cases, or to a dispute between the parties, which means that one partner refuses to sign.

What then is the position if this dispute is not resolved? The draft regulations simply state that the claim is to be made by whichever partner the couple agrees should claim. The Inland Revenue memorandum published in March says that if the dispute is not resolved, the Inland Revenue will consider accepting an application submitted by the caring parent without the signature of the working parent, even though "technically it would be defective". In other words, the solution to this problem lies in the Inland Revenue disregarding its own regulations. That, I believe, is simply unacceptable.

If the tax credit is paid through the employer to the husband with a non-working wife, there is a disincentive to the wife seeking work because that will cut the husband's wage packet.

I accept what the noble Baroness has said about privacy, that it will be very difficult for the employer to identify personal details from changes in the level of the working families' tax credit, but the CBI says that up to a third of the claimants now claim family credit without the employer's knowledge. That will now be impossible for lone parents or two-earner couples where the tax credit must be paid through the wage packet. The simplest solution would be for all employees to have the right to opt out. That certainly would not affect the take-up problem because it would be a joint decision to opt out.

If there are all those drawbacks, which I believe are serious, what is the advantage of the payment of the working families' tax credit through the wage packet? Surely what matters is the difference between the total net income out of work and in work? The incentive effects of the working families' tax credit will be due almost entirely to the increase in that difference, which we have welcomed. It makes no real practical difference that the money comes in two dollops rather than one. This is obviously so in the case of single parents. The research by the Institute for Fiscal Studies has shown that this is the group most likely to move into work as a result of the working families' tax credit. The only person who might be persuaded to take up jobs by payment through the wage packet, which they might not otherwise have done, appear to me to be the traditional male egoist who says "I am not going to take that job unless I get all the money and can dole out to my wife what I choose to give her." I do not believe that there are many such people left, but we should not do anything to encourage them.

It is sometimes argued that there is a stigma effect of getting family credit from the DSS which will be reduced if it comes through the wage packet from the working families' tax credit. I do not believe that, and the high take-up rate for family credit suggests that that stigma does not exist. If there is a stigma effect, people are likely to be much more worried about what their employers know about them than what the Inland Revenue knows about them. That worry will be increased by these proposals.

The noble Baroness will be glad to know that I have no objection to Clause 15.

The Bill is unnecessary and does more harm than good. It is not necessary to the Government's legitimate and broadly welcome proposals to make work more attractive by increasing the differential between in-work and out-of-work benefits. The Bill transfers the administration of the credits to the wrong department. It imposes more work and more costs on employers. It gives money to the wrong parent, and I believe it will do nothing to add to the incentive effect of higher benefits.

In the other place, my honourable friends voted against the Bill. I do not believe that it would be appropriate to do so in your Lordships' House. Moreover, we shall not support what we regard as wrecking amendments. But the Bill is capable of great improvement and we shall seek important improvements to it in the stages to come.

4.20 p.m.

Lord Freeman

My Lords, at the commencement of his speech, the noble Lord, Lord Goodhart, said that his contribution would be complicated and boring. Neither was true. The noble Lord was absolutely right in many of his comments and in particular on the central point he made. I am sure that he will find a good deal of support on this side of the House.

This is an unnecessary Bill. The same purpose could have been achieved by using existing legislation and introducing new regulations. Nevertheless, it is a Bill before your Lordships' House and the normal conventions clearly will be followed. But in Committee I am sure that there will be lively debates and many amendments moved.

The noble Baroness, Lady Hollis, commanded a great deal of agreement on all sides of the House when she spoke at some length, and correctly, about the importance for the welfare state of improving the incentives for moving those who are unemployed into employment. Any measure which achieves that sensibly will command your Lordships' agreement. But I agree with my noble friend Lord Higgins that a great number of points will need to be dealt with in Committee. I look forward to that process. My noble friend has a great deal of experience not only as a former Treasury Minister but as chairman of the Select Committee on the Treasury and Civil Service in another place.

I speak as a chartered accountant but also, with greater relevance perhaps to this debate, as a former health Minister who had to deal with NHS benefits, the complexity of those benefits and ensuring that they reached the right people. Therefore, my question is whether the Bill will work. Will it work to encourage the move from unemployment, self-employment or low employment into full employment? I leave aside the other benefits of the Bill which the noble Baroness outlined on which I do not intend to comment; namely, the increase in the amount of funds devoted to claimants. My question is whether the Bill will work.

My interest is in the impact of this legislation through its complexity—the forms and administration—on the lowly paid and, in particular, those who are self-employed. In that regard, we are probably talking of no more than 10 per cent. of the population of claimants but by definition, that group is probably the one single group which will have difficulty in mastering the complexity of the working families' tax credit. Those people will badly need help not only from us as legislators in ensuring that the legislation is clear but help also from another direction to which I shall turn later.

There are three points which I wish to put to the Minister. I do not doubt her grasp of the briefing, nor do I doubt the excellence of the briefing she has received. It may be more convenient for the Minister to write to me on these issues before Committee. I shall quite understand if that is so because she will have many points with which to deal when winding up the debate. Therefore, I should be grateful to receive a response in due course.

The first point—and it is important—is that when one moves the administration of a benefit from the Benefits Agency and the Department of Social Security to the Inland Revenue, a change of culture will occur. It cannot be glossed over. There is to be a transfer of staff to deal with a 50 per cent. increase in the take-up of this credit in a different name. But despite the transfer of staff, a different culture will pervade. Perhaps the Minister will confirm that the policy of joined-up government—I use the expression in the White Paper presented before Easter in another place—and the policy of the departments will be to maximise the legitimate take-up of benefit. Only 70 per cent., by volume of cases, of family credit is taken up. That is not enough. The proportion needs to be increased.

I pay tribute to the Inland Revenue for the excellent task it performs. But a transfer to the Inland Revenue, whose principal task is to collect revenue and not to distribute benefit, raises a whole number of very important issues. Some test of whether there has been an unnecessary turn of the anti-fraud screw could include, for example, whether there is to be additional time taken in order to calculate the benefit and then pay it. The Inland Revenue operates using different principles from those used by the Benefits Agency. That agency works generally on the presumption of need, seeking to meet it and then checking subsequently whether or not it is legitimate to have paid the benefit.

The Inland Revenue works on a different principle; namely, whether it is right in the first place. Again, from my dealings with the Inland Revenue, not professionally now but certainly as a Member of Parliament, I recognise that there have been long delays between submissions for tax reclaims and the ultimate settlement. Therefore, is there to be a change of culture? Are we still underlining the importance of legitimate maximum take-up and will the Government ensure that the Inland Revenue does not take more time than the Benefits Agency to deal with claims?

I give your Lordships one simple example. I am sure that we shall deal in due course with the forms which support this legislation. If one looks at those forms, it can be seen that a declaration is required by the claimant which is wholly different from the declaration made in other and more welcome forms used by the Inland Revenue, particularly for self-assessment, because the claimant must declare that the information he supplies is correct and complete. That is as opposed to the normal declaration which is that the information is correct to the best of one's knowledge and belief.

Secondly, the Minister indicated that the plan is that from October this year the Inland Revenue will administer family credit in the form of the working families' tax credit and from April 2000, employers will be making the payment through the wage packet.

As regards the forms to be used by the Inland Revenue, working obviously with employers, to the best of my knowledge there is common consent—that is, it is the opinion of the Inland Revenue and those organisations which have commented, including the low income tax reform group of the Chartered Institute of Taxation—that a great deal of simplification can occur. But the argument put forward by the Inland Revenue is that there is no time to change the form before April 2000. That is 12 months from now. That is the right point at which to simplify the forms to encourage take-up. It is in keeping with the taxpayer's charter. It is reasonable to ask the Inland Revenue to do that if it is given the right resources. I suspect that the argument that the forms cannot be amended in time is to do with resources and not willingness. April 2000 is the right time to change the form, and I should appreciate the noble Baroness's comments on that.

There is a shock-horror aspect attached to this matter. Your Lordships may not yet have had an opportunity to study the legislation but I ask your Lordships to look at WFTC 501. That is for the self-employed—someone who may be earning a very modest amount of money. The form which must be completed involves an extremely comprehensive declaration of financial information which is far too copious and is unnecessary for those on very low incomes. I am afraid to say that the procedure on the Inland Revenue self-assessment form appears not to have been followed. As your Lordships will know, there is a threshold of £15,000 of turnover below which, when one makes a self-assessment of the tax one owes as someone in self-employment, one only has to state turnover, expenses and profit. Form 501 asks for copious information and I believe it to be unnecessary.

Finally, I make a plea for consideration of the proposal from the low income tax reform group, to which I referred earlier, for voluntary help to be encouraged and supported by the Government for lower paid claimants in completing their forms. In the 1960s, while in employment, I was involved with such a voluntary group in the United States, helping the very low paid from the minority communities to complete some of their tax and benefit forms. If voluntary help comes forth particularly from my own profession and allied professions to seek in a pro bono publico fashion to help the elderly and the low paid self-employed to complete their forms, I do not see why it should not be welcomed with open arms.

I welcome the Inland Revenue's helpline. I believe that it works well but that more should be done. Perhaps I may conclude by quoting a letter from the Chancellor, Gordon Brown. He was responding to the Select Committee on Social Security in another place on the point that help is needed in the calculations and to decide whether a claimant was better off in work. Mr. Brown said: And the Revenue will continue to provide 'better off calculations'". The Inland Revenue does not at present provide "better off calculations". I suspect that it would be against the culture of the Inland Revenue to embark upon that on any great scale. More help is needed by amending this legislation to make it simpler and by encouraging others to help claimants raise the claimant rate.

4.32 p.m.

Lord Rix

My Lords, I begin by craving your Lordships' indulgence, and that of the Minister, in so far as if this Second Reading is somewhat protracted—the noble Lord, Lord Goodhart, indicated it may well be—I may not be in my place at the end of the debate. No disrespect is intended as I have a long-standing engagement—a 70 year-old engagement in fact—the three-score years and 10 which my wife is celebrating having achieved this evening.

In the event of my absence and in the hope that your Lordships will accept my explanation, I stress that what I have to say is of great import to people with a learning disability. Should I be away, warming up to sing "Happy Birthday to you", I hope that the Minister will be able to respond to me in writing or, even better, perhaps at a meeting before Committee stage. That said, I now wish to focus my attention on the disabled person's tax credit, which the Government are introducing to replace the existing in-work benefit, the disability working allowance.

The disabled person's tax credit is in principle no different from the disability working allowance. Both act as means-tested benefits which top up low earnings for disabled people. But there is a definite shift in the Government's approach, one which will benefit many, but may also have significant drawbacks. In the first instance I should like, if I may, to say a few words about people with learning disabilities and the labour market.

As president of MENCAP I am, of course, concerned about the effectiveness of the tax credit in supporting people with learning disabilities who wish to work. Many of your Lordships may be surprised to hear that statement but I have to say that 7,000 people with a learning disability are already in full employment through the MENCAP pathway system. Research by MENCAP reveals that many people with learning disabilities might benefit from financial assistance in employment. Nevertheless even if the tax credit acted as an effective incentive to work, even to the extent of doubling the proportion of people with severe learning disabilities in work, 80 per cent. of that group will still not be able to work.

The Treasury's approach, as one would expect, has involved looking closely at the way in which work and benefit calculations operate. In particular, the Treasury has examined the way in which receipt of some kinds of support can actually contribute to financial difficulty or act as a disincentive to work. All too often we hear of benefit recipients who are no better off in paid work than on benefits, and in some cases benefits are withdrawn so quickly when earnings come in that individuals or families see relatively little increase in living standards. The Minister's department has clearly troubled itself to avoid such consequences, and as a result has calculated new rules for the disabled person's tax credit which should help to avoid some of the pitfalls and leave more disabled people better off.

The proposed tax credit is more generous because the level of earnings below which help is given is being raised, and the reduction of help on account of extra earnings will be less steep. This is most welcome, and will, I am sure, soften some of the harsher effects of the policy of means testing.

The Government's mantra on welfare to work seems to refer only to full-time paid work, and this is borne out in the rules for the new tax credit. But many people with learning disabilities will need a combination of welfare and work. The Government must recognise that severely disabled people who can work will also need adequate benefits to compensate for low earnings. One of MENCAP's central concerns is for people with learning disabilities who are able to do some work, but are not able to undertake full-time work. Part-time work can often be a source of extremely important training or experience, and can often develop the self-confidence of a person with a learning disability.

The Government's proposals mean that people working fewer than 16 hours per week will not be able to access the new tax credit and will not receive any extra money to top up low paid employment. MENCAP recommends a phased entry into the disabled person's tax credit to enable claimants to gain a foothold into the labour market by working fewer than 16 hours per week for, shall we say, a limited period.

Unfortunately no amount of fiddling with formulae of the means test has managed to overcome problems facing disabled people with housing costs, who face having their housing benefit withdrawn as soon as they move into work. Herein lies an acute example of the "Catch 22 situation" where people cannot afford to come off benefit and go to work for fear of losing all support with the cost of their home. The Government have recognised this problem in part, and have put in place new rules to allow disabled person's tax credit recipients (who have moved from income support) to retain housing benefit for the first month of employment. But this delays rather than solves the real problem, because thereafter disabled person's tax credit recipients with housing costs could lose up to 96p for every £1 earned. Making sure that demands for rent or mortgages coincide with the first wage packet is the Treasury solution but allowing claimants to keep housing benefit while on the tax credit would offer a more genuine way of helping to "make work pay".

The Treasury suggests that the purpose of the new tax credits is to put a small amount of extra money into the pockets of low-wage earners. However, I believe that the disabled person's tax credit has an additional purpose in providing some level of compensation for the employment-limiting effects of an individual's disability. A large proportion of people with learning disabilities work at the lower end of the earnings scale and never come close to boardroom salaries. Sometimes that can be as a result of discrimination, or lack of support, but in many cases can be attributed to the limitations of the individual's disability. Furthermore, many non-disabled people are forced to give up extremely senior positions later in life at the onset of physical disability and find that they are only able to work again in much lower paid positions. Under current proposals the gains to the individual from the disabled person's tax credit are countered by the fact that the whole family income is taken into account in the means test. I believe that that detracts from the important principle of compensating and supporting individual disabled workers who are, after all, the ones going out and working for low wages. It seems to me that low wages are low wages, regardless of the individual's family circumstances. If low pay is indexed to the limitations on the individual which arise as a result of disability, the individual should be entitled to support in his or her own right.

To wrap up, I should like to say a few words in relation to the care of children with disabilities. As I am sure noble Lords are aware, this point was raised in another place and applies to the recipients of both the working families' tax credit and the disabled person's tax credit. Both credits contain an allowance to cover childcare costs. The Government have taken an important and welcome step in extending this allowance to disabled children up to the age of 16, but it will be available only where the childcare provided meets certain registration conditions.

The Government have broadened the registration conditions to extend the range of childcare available, but have not yet found a way of extending eligibility for children for care which needs to be undertaken in the home. Many children with learning disabilities require intensive support and care which can only be met in the child's home. MENCAP believes that the childcare tax credit should cater for children who need to be cared for in their own home, particularly those who are unable to access nursery buildings or who do not live near centres with specialist staff to look after children with physical or learning disabilities. The location in which childcare is provided should not govern entitlement to support for working parents.

Having journeyed this far into the realms of tax and benefits, Ministers deserve, if not credit, at least charity from those in your Lordships' House. In the main, the new policies will improve the situation for low-paid workers, but there is a danger of missed opportunity for those who do not conform to the standard norms of working and family life; in other words, people with a learning disability. The Tax Credits Bill must help them too, both morally and practically, into the working world.

4.42 p.m.

Baroness Carnegy of Lour

My Lords, your Lordships will remember that social security is not one of the powers devolved to the Scots Parliament. So this Bill and its effects will apply, and go on applying to Scotland as to the rest of the United Kingdom. In making a few general comments, therefore, I should like to point to one or two aspects of the Bill which I believe will cause concern in Scotland. The noble Lord, Lord Rix, with all his expertise, concentrated on the disabled person's tax credit; I shall confine myself to the working families' tax credit.

It was not clear from the Minister's long, interesting and detailed speech that the significance of this Bill goes far beyond the detailed social security changes which it proposes. In due course the social and financial effects of the changes will be widespread and far-reaching. I wonder if it is appreciated just how far-reaching. Many people, in Scotland at any rate, will be extremely surprised when they see the effects as they emerge across the country as a whole.

My noble friend Lord Higgins pointed out that the idea of bringing the tax and benefit systems together is in no way new. Indeed, it has long been discussed in this House. Many noble Lords will remember in particular that the late Lady Seear, speaking from the Liberal Democrat Front Bench—the very place from where the noble Lord, Lord Goodhart, made his fascinating and somewhat devastating speech—frequently and passionately advocated this approach. In fact, if I remember rightly, Lady Seear advocated a true tax credit system whereby a person paid less tax instead of receiving benefit. As my noble friend Lord Higgins said, the system that the Government are now proposing is one where a person simply receives benefit, separately itemised, along with his pay; it is not a tax credit at all.

But despite what has been said—we have had some expert speeches from people who know a great deal more about this than I do—I believe that the system the Government are now proposing, in principle, will probably appeal to those people receiving the money through the pay packet. They will like that. But there are some worrying aspects to the Bill. Some of the general aspects were discussed at some length in another place, but none is properly appreciated by the public.

The Government know that in Scotland people have a particularly strong sense of community. Public opinion of the Government in Scotland is very important to them. Scots have a strong desire for fairness to the less well off, and I wonder how the least well-off taxpayers will feel. For example, how will widows living alone, paying tax on a small private pension or on limited hard-earned savings, feel when they discover, as they soon will, that they are funding families with incomes of £38,000 who happen to have chosen to have five children? How will they feel when, as alas is bound to happen sometimes, connivance between employers and employees brings fraud or employers use the system to reduce wages because the employee can make up the difference through benefit? How will those least well-off taxpayers feel? What will that do for what the Government like to call "social cohesion"?

Across the United Kingdom, what will be the effect on the social attitudes of a large proportion of our younger people—1.5 million families according to the Bill's Explanatory Notes—becoming accustomed to state funding on this scale and making their family choices in response to the whim of the government of the day? It will be observed in Scotland that that is the whim of the Westminster government of the day. We should ask ourselves what will be the social and political effect of that? It is a matter for your Lordships' careful consideration.

I want to ask the Minister in particular what will happen to this scheme in a time of recession. She explained that the whole system is designed to encourage work—that is good—and to make work financially worthwhile—that too is good. But what happens when there are fewer jobs to go to so that people cannot qualify as working families and, in addition, there are no jobs for the new army of child carers and nannies which will be created under the Bill? The Government must have thought about that. Can the Minister indicate, when she replies, how the scheme will work in times of recession? It is crucial in many ways, not least for the sake of social cohesion in the United Kingdom. For example, the economic cycle in Scotland does not usually coincide precisely with that in the south of England. Will not the working families' tax credit exaggerate that divergence, one which will grow in any case between the economic cycle of Scotland and that for the rest of the United Kingdom? It would be interesting to know the Government's thinking in that respect. Indeed, it may well be something that we may wish to consider in Committee.

Linked to that, of course, is the effect about which others have spoken on employers and the extra cost that they will have to meet in applying the system for the Inland Revenue, at the risk of a penalty of £3,000 a time, it has to be noted, if they get it wrong. That is a lot of money for a small employer. They will also have to cope with the problems of the workplace when some employees do not want them or their wages clerk to know their personal family affairs. Scots are certainly not laid back about that kind of thing. I believe that quite serious problems may arise.

The Minister seemed surprised when my noble friend from the Front Bench pointed out the possibility that the man in the family will in fact get the money rather than the woman. I recollect that there was great delight in Scotland when the previous Government changed the position. It had become a big problem. Knowing the Scots, I can imagine the kind of family where the father might well just force the issue, accept the money and then spend it on whatever it is that is not the children. I believe that that may well happen. I should have thought that there would be some way around the problem. I do not know what it is, but I hope that we will also consider that issue in Committee.

Despite their claim to the contrary, the Government are planning to spend a lot more money on social security. They have told us that they will be spending £1.5 billion more on this scheme than they spent on the previous one. It is vital that it works to the benefit of those who need it. In principle it is a good idea to pay through the Revenue, although I appreciate the points that have been made about the culture of the Revenue as opposed to the culture of the Benefits Agency. I can also see problems arising in that respect.

However, the scheme must work for the benefit of those who need it. I believe that people in Scotland will be watching the early stages of the working of this Bill most carefully. The Government must think of the broad effects and the broad! political issues as well as the detailed provisions of the Bill. Nevertheless, I shall support this Second Reading.

4.52 p.m.

Baroness Lockwood

My Lords, I should like to look at some of the general principles behind the Bill and embodied in it. At the time of the 1997 general election, one in three children in this country lived at or below the poverty line. As my noble friend the Minister indicated, this is something that cannot continue. So the strategy of the Government since that election has been to attempt to eliminate this social stigma. Policies have been directed towards assisting families with children and helping people into employment. The tools of this have been increased children's allowances, the minimum wage, several New Deal training programmes and now the working families' tax credit, which is embodied in the Bill and forms an essential part of that strategy. Therefore, for those reasons I support the Bill as part of the drive to eliminate poverty. Unlike some noble Lords opposite who have already spoken, I think that it is a good Bill.

However, I support the Bill for another reason. It seems to me to be a nonsense, as the Institute of Fiscal Studies has observed, that, Why have a tax system that takes money away from the poor and a social security system that gives it back". I believe it is a nonsense to have two separate systems. Like the noble Lord, Lord Higgins, I personally think that there is much to be said for an integrated tax and benefit system across the board. As has already been said, such a system has been considered over the years but it has never been policy for any government. In view of what the noble Lord, Lord Higgins, and the noble Baroness, Lady Carnegy, have said, one wonders why in the whole of the 18 years in which their party was in government we did not have the introduction of such a system.

The latest attempt is now, I believe, taking us some way forward. Here I disagree with the noble Lord, Lord Higgins. The task force that was set up by the Chancellor of the Exchequer under the chairmanship of Martin Taylor to review the tax and benefits system and to examine the capacity for increased integration did not, in the end, recommend full integration in its report of 1998. However, it did recommend the replacement of the current "family credit" with a tax credit. In doing so, it said that, the establishment of a tax credit system is likely to come in useful in future as a broader delivery mechanism eventually allowing a closer integration between the benefits system and conventional income tax". So this could be regarded as an incremental measure leading to further integration in the future. Indeed, the Government have extended the Taylor principle by including the disabled in the Bill. I believe that that should be welcomed, while taking into consideration some of the caveats raised by the noble Lord, Lord Rix, about disabled people who are unable to work 16 hours a week. Therefore, the Bill before us today is meant to replace the family credit with the working families' tax credit and to replace the disability working allowance with the disabled person's tax credit.

In her comprehensive and lucid exposition of this very complicated subject, my noble friend the Minister outlined the benefits that will be available. I believe these to be very considerable. For example, low paid families receiving working families' tax credit will, on average, be £17 a week better off and some 1.3 million families with children will benefit in the first full tax year. There will also be a guaranteed income of £190 per week for families with one full-time worker earning the minimum wage—and this is a point which the noble Baroness, Lady Carnegy, did not take on board when she mentioned that there might be a drive to lower wages. Indeed, the minimum wage will secure a minimum level of wages.

There is also to be an increase in the benefit level and a reduction in the tax taper disincentive. The tax burden on families will be reduced so that those earning less than £220 a week will pay no net tax. There will be similar help for the disabled and more generous help with childcare costs, together with an increase in the age at which childcare costs will continue to apply. As I say, these are very considerable benefits. They will go some way, although perhaps not the whole way—I do not think that there is a system which could do so—towards removing the work and the poverty trap disadvantages that make it so difficult for deprived and excluded families to get back into the world of work and betterment.

Like every social security Bill, this Bill is complicated, and perhaps it is made more complicated by being a Treasury as well as a social security Bill. Much of the detail is in the regulations—regulations which are already covered by previous legislation. Therefore we are not introducing a new principle by dealing with detail through regulation. I have been rather surprised at some of the criticism about the fact that we are having a new Bill instead of just regulations under old legislation, because the very fact that we have a new Bill means there is more opportunity to discuss and explore all the potential and the pitfalls of the legislation. It is useful to have a comprehensive Bill covering that. However, there are problems, as have already been indicated by some noble Lords who have spoken.

The first matter that I want to look at is the method of payment. I recognise that there is a real dilemma here for the Government because the principle behind the Bill is to attract people back into the labour market. By removing the disadvantages of going into work, the tax credit system is intended to boost the wage of the worker. In that sense I understand the principle that the Government are working on, but it contradicts the other principle that where there is a child or a family benefit it has become the custom for that to be paid to the woman. In general I support that principle and I want to see it embodied in the Bill as far as possible. We must look at the size of the problem with which we are now concerned.

In response to a Question in the other place the Treasury Minister there indicated that 50 per cent. of those who receive family credit, and who will receive the working families' tax credit are lone parents. They are largely women, although a male lone parent, like a woman lone parent, who is responsible for caring for the children will receive the benefit. In 50 per cent. of the cases we are already meeting the principle that it is the woman who should receive the benefit. The question was raised as to why lone parents should not have a choice whether or not to have a tax credit or a benefit. It seems to me that the important point is that the lone parent gets the benefit anyway and is thus able to assist her family.

The second point that was made in the other place in response to the Question was that in 23 per cent. of cases involving couples, the woman is the main or sole earner. Therefore, again, the tax credit will go to her.

That means that as regards some 73 per cent. of those in work the tax credit will go to the woman. What of the 27 per cent. who remain? I might add that with regard to that 27 per cent., and indeed the whole group, something like a third of a million people have their family credit paid into a joint account. So, again, some of those will be covered in the 27 per cent.

The Chancellor has already indicated that there is to be a choice in this matter. I certainly welcome this. However, the question that one has to raise is: how real is the choice? Will it be made quite clear to women? For example, will women who already receive family credit receive a communication telling them that they will be able to sign the form claiming the tax credit? This choice must constitute a positive measure and must not be something that goes by default. If it does go by default, and if neither parent signs the form, will the woman be paid by default, as the Select Committee in another place recommended?

I understand that if there is a disagreement between husband and wife, the wife will receive the benefit. That is what I am led to understand. Perhaps the Minister can confirm that in her reply. We are dealing with a small group of people.

That leads me to ask about the form. I was going to ask the Minister if the form was available for discussion. I must confess that I have not seen it, but I was somewhat alarmed by what the noble Lord, Lord Freeman, said as I believe the form needs to be simple and straightforward. We cannot expect people to cope with a complicated form. I ask the Minister whether it can be made available for discussion and amendment?

Finally, I ask the Minister what general publicity will be given to the introduction of the family tax credit scheme, given that it is a completely new type of scheme and one that is designed to encourage people back into employment? If it is to be effective, there will have to be simple and straightforward publicity about it. I do not believe that the booklet that my noble friend mentioned is adequate. Perhaps she can tell us what will be done to make it clear to people that this benefit in the form of a tax credit is available.

A number of issues have already been raised across the Floor. Clearly there will be some detailed discussions in Committee to which I look forward. In the meantime I welcome the Bill and I welcome the principles behind it.

Baroness Carnegy of Lour

My Lords, before the noble Baroness sits down, I hope the House will forgive me if I take a moment to ask her the following question. In her opening remarks she told us how many families are below the poverty line. I think that was probably a quote from the Chancellor. Can she tell us the definition of the poverty line because it is a difficult matter to understand when it seems to be a movable line. What is the definition?

Baroness Lockwood

My Lords, this may not be the official definition, but my definition is those receiving half the average wage.

5.9 p.m.

The Earl of Buckinghamshire

My Lords, the noble Baroness the Minister has clearly outlined with her customary skill the details of the Bill and, of course, she has extolled the virtues of the Government's decision to replace family credit from October 1999 with the working families' tax credit and the disability working allowance with the disabled person's tax credit. I admired her ready reeling off of the initials of each of these items. I seem to recollect WFTC, DPTC, IS, DWA and NICs. My revenge will be that when we come to the Welfare Reform and Pensions Bill I will retaliate with PUPS, PILS and EPBs!

I shall confine my brief remarks on the Bill to the working families' tax credit. That is not because I regard the disabled person's tax credit as not being important but because I knew that the noble Lord, Lord Rix, would be speaking on that aspect. I was delighted to hear what he had to say and I am very supportive of it. It will be no surprise to the Minister to hear that I am more closely in tune with what was said by my noble friends Lord Higgins., Lord Freeman and Lady Carnegy of Lour. I listened with great interest to the exposition of the noble Lord, Lord Goodhart, and I am close to the views which he expressed to the House.

The working families' tax credit will initially be a tax credit administered by the Inland Revenue but from April 2000, for those employed it will be directly paid by employers through the pay packet while for the self-employed it will continue to be paid directly by the Inland Revenue. From a number of sources, including Treasury press releases, the family credit statistics quarterly review inquiry and noble Lords taking part in the debate, we have heard that family credit has been a success, with take-up on cases in excess of 70 per cent. and by expenditure in excess of 85 per cent. It has reached some 757,000 families at a cost to the Exchequer of £2.35 billion in 1997–98. The working families' tax credit is more generous than family credit. That is partially because of its higher income thresholds, with a gentler taper in its effect on incomes, and because of its more generous help with childcare costs. Consequently, the Treasury expects the numbers of families covered to increase from the 757,000 I have just mentioned to approximately 1.4 million at a cost of around £5 billion a year.

I should like to consider this tax credit against a number of criteria. For those in receipt of the credit for children, the threshold will range from £31,000 to between £37,000 and £38,000. Is that a sensible level at which to set it? My noble friend Lady Carnegy has already expressed concern on this point. Secondly, will the tax credit system work more efficiently than family credit? In other words., would it not have been better to build on to what was already there, even if that is anathema to the Benches opposite? Thirdly, will it be simpler to administer? Having listened carefully to the Minister, I have come to the conclusion that it will probably not he simpler to administer. I have already mentioned the fact that a good deal of money will be spent on the scheme. Will it be money well spent?

If one of the objectives is to reduce welfare dependency, a threshold of between £31,000 and £37,000 or £38,000 (for a higher rate taxpayer), depending on whether one has, say, five children, seems at first sight to be somewhat generous. The noble Baroness, Lady Lockwood, asked why, as the Conservatives were in power for 18 years, they did not get round to integrating both systems. I should point out that the systems of collecting tax and giving benefits do not sit easily with each other. With the increases in basic credit and the under-11 child credit announced in the Budget, there will also be a danger of increasing welfare dependency, not reducing it. So I have some concerns about the level of the upper thresholds.

Will the new tax credit system work? Well here, I suppose, you need to revert back to the Government's task force report which claimed four major advantages over the now to be replaced family credit. They are: first, a tax credit will reduce the stigma associated with claiming in-work support; it will be more acceptable than social security benefits to most claimants; as it is paid through the wage packet it will emphasise the rewards of being in work rather than being on welfare; and it could help to lower marginal tax and benefit withdrawal rates. It remains to be seen whether those virtues of the new tax credit system will be achievable. Will it, as the Chancellor said in his Budget speech of March 1998, tackle the unemployment trap, ensuring that work will always, pay more than benefits [ensuring] that the more you earn, the more you take home".—[Official Report, Commons, 17/3/98; col. 1105.] The omens are not good. The Institute of Fiscal Studies stated: There are … significant incentives for second earners to leave employment altogether". That must be of some concern to us. The stigma associated with claiming support under the current system is not proven, as the Joseph Rowntree Foundation found in January 1998. Even Martin Taylor, who headed the Government's task force, admitted in his evidence to the Select Committee that, as far as stigma goes, the hard and fast evidence in all these non financial and psychological matters is difficult to come by". Then, unfortunately, there is the question of fraud. The Select Committee on Social Security expressed concern that not enough attention had been paid to this issue. Furthermore, the US system—and the Canadian system—upon which much of the UK tax credit system is significantly based suffers from fraud and certainly an explosion of costs, with spending in the US on its system increasing from 1.7 billion US dollars to 18 billion between 1986 and 1996. I was particularly interested to hear the noble Lord, Lord Goodhart, say that he expected that at some stage the tax credit system would have to be cut back because of its expense.

There is also the impact on the family. Under the family credit system, payment is made most frequently to the mother. The new tax credit system, with payment through the pay packet, is, as the TUC pointed out in its 1999 Budget submission, likely to divert assistance away from the primary care giver in the family". The noble Baroness, Lady Lockwood, asked the Minister to clarify this area of concern. So despite the increased numbers of families that may be reached, there is the curious side effect that those who need the money most—the mother and child—may well receive less.

So far the best that I have been able to say is that more families are likely to be eligible for cover through the new tax credit system and that it is a more generous system than was in place under family credit. But, paradoxically, as I have already mentioned, less financial help may reach those most in need at a greater cost with a knock-on impact on increasing welfare dependency without increasing the motivation to work.

So what about administration? From April 2000 this will be passed largely from the Inland Revenue to employers for those in employment, despite the fact that the Inland Revenue will calculate it. This will raise cash-flow issues as the employer funds the tax credit. There are also significant administrative problems as the tax credit system is linked to a 26-week cycle whereas PAYE is on a 52-week cycle. As we heard from the noble Lord, Lord Goodhart, the Bill makes no provision to ease cash-flow problems for employers, particularly small employers; and there is no mention in the Bill of assisting with the administration costs, the size of which sounded significant.

It is reasonable to say that, although there is much merit in the Government's intentions of which we on these Benches would be very supportive, the additional costs incurred on a cost-benefit analysis possibly do not add up.

I might be more positive if I did not consider the Bill to be thinly drafted. The noble Baroness, Lady Lockwood, said that complaints about having a new Bill in this area are misplaced because we have the opportunity to debate this important subject yet again. Unfortunately, we are debating it in the face of a very thin Bill, to be followed by secondary legislation through regulations which are not subject to parliamentary scrutiny. It already needed an amendment on Report in another place to include childcare benefits. That is a somewhat surprising omission given the Minister's assertion on the "Today" programme on 26th July 1998 that the really important element for women is the presence of child care credits". Noble Lords probably listen to the programme if they get up at six o'clock in the morning.

In addition, I fear that the Government, as with many other financial proposals, are playing a game of poker with us, the taxpayers. The tax credit is counted as a tax cut although in fact it represents an increase in social security spending, which this Government were committed to cut.

I conclude by hoping, perhaps somewhat perversely from these Benches, that this tax credit will help to lever families out of the unemployment and poverty traps. I am sure that we on these Benches will help to improve the Bill in order to assist the Government in achieving that objective.

It has already been mentioned once during this debate that this is a flagship Bill. Rather like American aircraft carriers, which are flagships, there is always an Achilles heel, a weakness in the construction. In the case of US Fleet carriers, apparently the Chinese have found, through the bibulous activities of a lieutenant commander in the US Navy, that their weakness lies in the thinness of the hulls at the level of the keel. I suggest that the weakness of this Bill lies at the keel. Unfortunately, the Government think that in many areas there are easy solutions. In this area, which is extraordinarily complex and in which there are many intractable problems associated with the unemployment and poverty traps, I fear that they may well have under-estimated the difficulties that lie ahead.

5.22 p.m.

Lord McNair

My Lords, this is indeed a highly technical Bill. I hope that I am being brave rather than foolish in venturing to take part in this Second Reading debate. I listened with great interest to the speech by my noble friend Lord Goodhart. I agree with the noble Lord, Lord Freeman, that it was not a long and boring speech. In fact it took up less time than the two preceding speeches. It was carefully detailed.

As noble Lords are well aware, I am not an expert in either tax law or social security as they are presently understood. In fact, I feel myself to be rather an ugly duckling on a lake full of swans in terms of the academic background and experience of other contributors.

I did say, "as presently understood". My main reason for joining in this debate is precisely on account of the complexity of the proposals in the Bill—not only the complexity of the proposals but the inevitable complexity of the administration of the proposals once they become law.

There is a fundamental law of engineering that, whenever you insert any control mechanism into a flow system, you lose a minimum of one-third of the energy throughput. So if you have, let us say, £1 million to distribute the control mechanism will "cost" £330,000. In the case of this Bill money is made available on the basis of, in the last resort, the legal sanctions described in Clause 9. So if you have some kind of test of entitlement, you have the cost of administration; the leakage from the system from evasion, or in this case non-entitlement; the cost of enforcing the legal sanction; and the cost of enforcing the financial penalties provided for under the clause.

My locus, if I can claim one, for joining in this debate is that I am chairman of the UNITAX Association. UNITAX is the mechanism of the resource economics proposition. Copies of the literature on resource economics have been circulating among several departments, including the Treasury. It is possible that Treasury officials had some sight of these proposals before the Budget.

UNITAX is a once-only tax on primary energy resources, which makes possible the huge simplification of the tax and benefits situation, which is the proposition's great advantage. If it was indeed studied by Treasury officials prior to the Budget, then perhaps I should own up to some responsibility for today's traffic jams.

It is of course widely accepted that a little knowledge is a dangerous thing, and I most sincerely hope that the Treasury, the Department of Social Security and all other relevant departments, will study the material and consider its possibilities and implications carefully so that, in time, by implementing the full package, they earn the gratitude as well as the brickbats of the people.

I realise that the Government are wedded to this further complexification of the tax and benefits system for the best of motives. I support and applaud those motives. But implementing the basic income provision of the resource economics proposition would cut through the Gordian knot which the Government are bent on tying even tighter in their laudable efforts to make life easier for those on low incomes, whether parents or the disabled.

I understand the Government are attempting to reward contribution rather than non-contribution, and in a sense that is how it should he. Resource economics offers a basic income for every citizen of £117 per week, derived from a resource tax, as I mentioned earlier. This Bill attempts the impossible. Resource economics and UNITAX achieve the otherwise impossible.

By giving every citizen of this country such a basic income as of right, non-selectively and without means test, and at the same time ending all direct taxation—yes, the figures work and the system does provide such a possibility—we should remove from the equation any possibility of discrimination between legally married and cohabiting couples with children. It would also end the awful cohabitation rule by treating each person over 16 as an individual in his or her own right. I call the cohabitation rule "awful" because its effect is to force couples who fear detection or wish to obey the rules but who, on very little money, are worse off as a couple to live apart. The basic income made possible by UNITAX has the opposite effect; it positively rewards cohabitation or marriage if that is the choice made by the couple concerned.

Finally, I ask the Minister to consider one of the points made by CARE, the Christian Action, Research and Education organisation. This point was raised by my honourable friend, Steve Webb, in another place. Like the DPTC, the WFTC aggregates a couple's income and savings to restrict the amount of credit. But unlike the DPTC, the WFTC does not give a larger credit to a couple. As a result of this "heads the Exchequer wins, tails the couples lose" approach, families headed by couples will lose out. That will result in some better-off families receiving more help than poorer families. The different treatment of two adult families under the WFTC and DPTC was raised during the Third Reading debate in another place, but the Minister did not provide an answer. I hope that the noble Baroness will do so at this stage.

Baroness Knight of Collingtree

My Lords, until I read the Bill, I had no intention of speaking in today's debate. However, several aspects of what is proposed worry me. In the interests of brevity, I propose to speak on only three, each of which touches upon what is for me a fundamental belief.

The first is that it is wrong and foolish to arrange for people to claim state benefits when they could manage without them. It is wrong for the individual and wrong for the state. The more that people find they can obtain money without working for it, the less they are inclined to bother to work at all, and the tax burden grows heavier on those who do work. Governments have no money of their own; all they have is what they take in tax from the workers and savers among us. I sometimes think that that should be said more often. It is not widely understood outside this place.

I believe that state benefit should always go, and only go, to those who are in need. There should always be help for the sick, the disabled, those who are unwillingly unemployed and all who cannot, for one reason or another, help themselves. But any country making handouts available to those who can perfectly well stand on their own feet must sooner or later face economic ruin.

During the first part of the Minister's speech, I thought that she and I were on exactly the same rails. "Hooray", I thought, "there is agreement across the Floor on this". But, in spite of what she said about encouraging people to go back to work, and so on, this Bill puts more people than ever into the state benefit net.

The Institute for Fiscal Studies, analysing the Bill, says: There are … significant incentives for [some] to leave employment altogether". It goes on to say: Almost [a million] men and women in two earner couples see their financial returns to employment fall as a result of WFTC". It also says: The increased generosity of in-work support may be used to allow the second earner to give up working". I continue to be worried about that point.

Secondly, I believe most profoundly in the importance of marriage, and I thought that the Government did, too. Silly me! But perhaps I can be forgiven because they did say in a recent Green Paper: Marriage is still the surest foundation for raising children … We want to strengthen the institution of marriage; to help more marriages succeed". I believed that that was what they meant. If it is what they meant, why pass a law such as this which discriminates so clearly against married-couple families? In the Bill married couples stand to receive less credit than unmarried couples. How does that strengthen the institution of marriage? Perhaps it should be obvious, but I do not understand. Does enabling single parents to receive more than married couples in similar circumstances really "help more marriages succeed"?

Why do the Government not recognise that it is a good thing for the country and the family if a mother of very young children chooses to stay at home and look after them, taking responsibility for them until they are a little older? The Government should recognise that and take account of the costs of it, which are not insubstantial. The way that the Bill totally disregards the cost to the mother of very young children of staying at home to look after them is wrong. Instead of making money available to the mother, it is to be made available for the mother to give to someone else. As the noble Lord, Lord Goodhart, so rightly said, to pay for two women with children to look after each other's children rather than to stay at home to look after their own children is absolutely absurd. Some would say that the Government actually bribe the mother to leave her children in the care of someone else. There are thousands of women who would like to stay at home and look after their small children but they cannot afford to do so. The Government are now dangling money in front of them to go out and get a job and pay a sitter for the children. It would be far better to help the mother to look after the children.

I said at the outset that I had three fundamental objections to the Bill. My third relates to my respect and concern for businesses. I believe that no country can prosper if businesses are collapsing all around. We depend more than we ever admit on businesses succeeding. It is my belief that governments should not take actions or impose burdens which make it more difficult for those who run businesses. If we constantly hamper business and industry, the country suffers. We live in a highly competitive world and business people today have quite enough problems in keeping going at all. They already carry out far too many tasks, unpaid, for the Government and many of them struggle to survive. This Bill gives them yet another duty; it imposes yet another burden; it inflicts a yet greater workload. They will have to administer working families' tax credit. Until I heard what the noble Lord, Lord Goodhart, said today—and he has looked at the costs of this—I was not aware that such a careful study had been made. Any calculation that I made was much shallower than the noble Lord's. I was very worried when I considered what the cost to business would be. And what about the cost to the Inland Revenue? It will surely be enormously complicated for it. I believe that that has not been addressed as an extra cost of the Bill.

However, I think it will be worst of all for small businesses. They cannot allocate work-hours from one of their clerical staff if they only have one clerical member of staff, as many do. The overwhelming majority of businesses are small businesses, and they work very much hand to mouth. The CBI has expressed its concern about this matter and the employers' associations which have seen the proposals—and not all have—describe them as a logistical nightmare. The Social Security Select Committee in another place was told in evidence from the Citizens Income Trust that there were "enormous problems involved" in the Bill.

From next April employers will not only have to oversee who receives the money but will have to find the money themselves, out of their own cashflow initially. All the Government have said in response to complaints is that, if there is any difficulty, employers can apply in time to the Inland Revenue. Heaven knows what "in time" means. Is it before they are bankrupted? I do not know. How much time after they have complained about having to find the money will the Inland Revenue take to pay them the money? If the firm in question has a dispute going on with the Inland Revenue—and many do—I can envisage the Inland Revenue not paying the money back at all until the dispute is settled. With great respect to the Minister, to decide who gets the benefit will not be nearly as easy as she believes. This matter has dogged Bills of this kind in another place for many years. I always had a feeling of déjà vu. At an earlier point in this debate the noble Baroness shook her head very decisively and believed that there would be no difficulty at all. I tell her now that there will be difficulty because who should receive the benefit is a big bone of contention between many thousands of men and their wives. We came down very strongly on the side of the mother receiving the benefit because all the information and experience at our disposal indicated that men would not spend the money on the children but mothers would.

I do not believe that the Government have begun to understand how serious a burden this will be on the employer. I can envisage an angry mother having a real row with the employer if she does not agree that her husband should be paid the money. I am absolutely certain that there will be rows of that kind. I do not believe that the majority of men and women who run small businesses know what will hit them. Having come down Park Lane this morning, I pale at the thought of what hauliers will say when this is added to their present problems.

Once again the Government have demonstrated their penchant for saying one thing and doing the opposite. They trumpet their support of marriage and businesses, the reduction of social security and tackling fraud, but their actions utterly belie their words. I was very interested in the observations on fraud of my noble friend Lord Buckinghamshire. As I understand it, Canada, which adopted a Bill that followed exactly these lines, had to jettison it because it was an open invitation to fraud. Frank Field, whom all of us respect because he speaks from great knowledge of this area of politics, said: The whole of the family tax credit venture is fraught with great dangers. It offers huge bonuses for dishonesty. It strengthens the employers' hold over working people—'These are the conditions: cheat and both of us will be better off'. It thereby pulls employers into a spider's web of dishonesty and corruption". If that had come from anyone but Frank Field I would have looked at it much more critically, but he is a spokesman who knows what he is talking about. For these and other reasons I have the greatest concerns about the wisdom of this Bill.

5.43 p.m.

Lord Skelmersdale

My Lords, I am grateful to the noble Baroness the Minister for the extensive rationale which she gave for this Bill, including what she described as her two throw-away introductory paragraphs. I only half-heard them, so I shall have to read what she said to find out whether they add to or subtract from the argument that she mounted. I say straightaway that I believe that it is a proper role for the state to support low-income families either in or out of work. Today we are discussing the former and what the Government believe is a better way.

However, rather like my noble friend Lady Knight, I am confused. It was only a few short weeks ago that I sat bolt upright in my place when I heard a noble Lord use a mixed and anatomically incorrect metaphor. He spoke of a tiger changing its spots. It may have been an error—I do not know—but I believe that it is applicable to the Minister today. She will remember—patience, patience—the then government's policy to extend family credit to families without children in 1995—

Baroness Hollis of Heigham

Yes, my Lords. However, I also made very clear—I am sure that the noble Lord would, with his usual integrity, have gone on to say it—that that was because it failed to be underpinned by a minimum wage and therefore it was a charter for an employer to continue to sweat cheap labour.

Lord Skelmersdale

My Lords, I shall remind the noble Baroness of exactly what she did say when my noble friend Lord Mackay announced it: I ask the Minister to be aware of the perverse consequences of such a policy. It is an encouragement to employers everywhere to press wage bills and wages down to whatever level they can get away with, knowing that the Government will subsidise the wage bill for them in the name of family credit, if those people have children, and 'non-family credit' if they do not. It is very odd indeed that, on the one hand, we see a series of national insurance measures—statutory sick pay, no doubt maternity pay and the like—which should properly be funded by the taxpayer pushed on to the employer, whereas the one area of responsibility that one might reasonably expect the employer to provide, a decent living wage, is increasingly being sustained by the taxpayer. It is a rather odd and perverse swapping of functions which in our view is folly".—[Official Report, 27/2/95; cols. 1346 and 1347.] The Minister then went on to talk about something else.

If family credit is folly, why is family tax credit not folly? If the noble Baroness was right in what she said at that time—and she was right then—why has this tiger in social security matters—all credit to her for that—changed her spots today? I believe that this Bill is folly—or, rather, if the Minister was right then, it is folly compounded. It still rewards employers who pay low wages, but it is the effect on the family that worries me.

Under family credit the payment usually goes to the mother. We have heard a lot about that this afternoon. However, under the new system it is not difficult to imagine frequent rows between parents as to who will get the benefit. Paragraph 14 of the Explanatory Notes makes clear that from April 2000 the tax credits will be received through the wage packet. I assume that this means that the earner will have to claim. It certainly means that the wage earner will get the money unless the female failsafe scheme (if I may so describe it) of the noble Baroness, Lady Lockwood, operates. Often, although I accept not invariably, that will mean that the male still gets the money. Is it not at least tempting for him to use it on beer, cigarettes, gambling or whatever? That point was made by my noble friend Lord Higgins and others.

The Minister waxed positively lyrical over the choice available where there were two wage earners in the family, but in my book that makes the situation worse. The Government do not appear to have learnt anything from overseas. America and Canada had similar systems to this and discovered that the deals between employers and employees not only could, but did, result in fraud of the system. We have heard that Canada has now dropped it. Can the States be far behind? What makes this particular version of the tax credit scheme better than, say, the American or Canadian model? I am sure that the noble Baroness will have an opportunity to answer these points at some length a little later.

This scheme is also intrusive. Even if, as the Minister claims, it does not require employers to inquire into their employees' domestic arrangements in order for the credit to be paid, the employers will immediately know that individual employees' circumstances differ. It is also an admitted added cost on business to administer it as is made quite clear in the Explanatory Notes. If the Government are so dead set on a proven dangerous scheme, why at least can it not be administered through the tax code? We know that it will not be. However, I have not discovered any reason why that is so. Surely, that would minimise some of the problems. These tax credits are generous—much more so than family credit. I am not surprised that my noble friend Lord Buckinghamshire commented on this matter. They go much further up the income scale than family credit. I am told that families who earn as much as £37,000 a year can receive some help. In extreme cases, they can even draw higher rate taxpayers into the benefit net. Is this really what the Government, still less taxpayers generally, want?

No doubt the Minister will argue that by definition a tax credit is not a benefit. My answer to that is that anything which is means-tested, as working families' and disabled person's tax credits are, must be a benefit—and not only that. Here we have a benefit that is a distortion of the tax system. Is it logical that on the one hand the Chancellor is doing away with MIRAS— and here I agree again with my noble friend Lady Knight of Collingtree—and the married couples tax allowance and with the other introducing a new allowance that, on the face of it, appears to be anomalous because it penalises two-parent single-earner families as opposed to single-parent families, as the cost of bringing up children at home is ignored?

My noble friend talked about next-door neighbours looking after each other's children and described that as "absurd". I accept that money has to change hands and that both have to be approved childminders under Clause 15 but, with great respect to my noble friend, "absurd" is too weak a word. My father would have called it an absolute nonsense. My advice to the Government is to drop that innovation like a hot cake. Like the noble Lord, Lord Goodhart, I want the Government to make family credit work better, but they will not.

At least the Bill has a few ameliorating features. The noble Lord, Lord Rix, pointed out that disabled people will have 182 days instead of 56 to find a job after other benefits have been withdrawn, which is a distinct bonus. So too is Clause 7 and its Northern Ireland back-up in Clause 16. Unfair dismissal or other detriment is outlawed so far as concerns obligations on employers to be responsible for making tax credit payments. That is certainly helpful in ensuring that employees not only get the money due to them, but that they cannot be penalised for asking the employer for it. However, I cannot see that it does much to counter fraud.

As to Clause 16, I readily understand that tax and social security matters are not the prerogative of the Northern Ireland Assembly—nor, correctly, will working families' and disabled person's tax credits. However, the Bill amends the Employment Rights (Northern Ireland) Order 1996 by inserting at paragraph 4 of Schedule 3 a new regulation to deal with the right of an employee not to be dismissed unfairly—an arrangement that I have just lauded. The Minister might save time in Committee if she could explain what happens to those unfair dismissal rights if the Assembly decides to appeal the whole order. As I read the Explanatory Notes, the Assembly could do that if repeal affects employment rights generally". That seems odd to me but there must be an explanation and no doubt the Minister will explain either today or by letter in due course.

The last time that the Minister and I crossed swords over a Bill—it was the Social Security and Contributions (Transfer of Functions, etc.) Bill—I gave it half a cheer. My noble friend Lord Higgins was somewhat more generous on that occasion. I seem to remember that he gave it two cheers. I doubt that he, and certainly not I, could go that far today.

5.52 p.m.

Baroness Turner of Camden

My Lords, I welcome the Bill and I am grateful to my noble friend the Minister for the clear way that she explained its complexities. The principles upon which it is founded are good. The Government are right to target benefits at children. It is clear from recent surveys that far too many children are being brought up in poverty, which is not in our country's long-term interests. Children in poverty who are raised on a poor diet perform less well in school and are likely to remain uneducated, unskilled and a largely unsatisfied underclass. The Government are determined that that should not happen and we should support them.

I am indebted to the Child Poverty Action Group for its briefing, which states: Because we believe that the WFTC brings welcome resources to families, the CPAG concern is that the system should work as well as possible and be taken up as widely as possible". That is my standpoint.

I have one or two questions, mainly about the way that the new system will work. The WFTC is to be paid via the wage packet of the highest earner of a couple. Even now that is likely to be the male partner. I understand why the Government want that done. It was explained this afternoon that the intention is to provide an incentive for people to work. However, such research as has been done shows that money paid direct to the mother is more likely to be spent to the benefit of the children. The Minister said that there would be a choice as to who would receive the payment. The CPAG asks whether notification of the award could be sent to both partners and whether there should be provision for settling disputes between partners as to who receives the payment, with the aim of ensuring that the tax credit benefits the children.

The new system replaces the passporting of benefits under family credit, whose claimants are currently entitled to a whole range of passported benefits such as dental treatment, sight tests, prescriptions and so on. Children whose parents are in receipt of income support and income-based jobseeker's allowance are entitled to free school meals. Will those benefits be available to recipients of FWTC? Can one be sure that the Inland Revenue, which will have responsibility for payments rather than the Benefits Agency, will have in place mechanisms to ensure prompt payment—particularly where there is a change of job, the employer cannot or does not make a payment, and so on? I gather that in the latter cases the Inland Revenue will take over and make direct payments. The noble Lord, Lord Freeman, raised that issue in connection with the switch from the Benefits Agency to the Inland Revenue and the change of culture involved. Will there be staffing implications?

Allied to that is the situation of self-employed people. Many people now in self-employment as a result of the massive redundancies of the past decade are certainly not well off. I understand that they will be able to apply for WFTC. Many such people, employed on what the construction industry used to call the "lump", are technically self-employed on short-term contracts because that is the only work that they can get. Employers like the system because it enables them to avoid all the usual costs of conventional employment. Presumably systems will be evolved to take care of such people—who are really employees but are often more exploited than those who are technically regarded as employees.

The Bill has provisions for enforcement if employers do not co-operate. I welcome the provision in Schedule 3 which is headed: Rights of Employees not to suffer unfair dismissal or other detriment". It is clearly the Government's intention to ensure that employers cannot escape their obligation by making threats to employees who insist on their rights which could result in their dismissal or conversion from employee status to that of a self-employed person on a short-term contract. In such a situation, the employee will have the right to take the case to an employment tribunal—which will presumably deal with it under the Employment Rights Act 1996. Those provisions are certainly most welcome and one hopes that they will be made widely known to employees so that they will know how to proceed if they have difficulties enforcing their rights.

I am glad to note from the Confederation of British Industry's briefing that it supports the introduction of WFTC and the increase in the value of the credit announced in the Budget. However, the briefing raises issues of concern in relation to which the CBI seeks amendments. The first relates to an exemption for small firms; but I cannot support that demand. There are far too many small firms employing far too many people for such an exemption to be realistic. Moreover, I understand that the Inland Revenue is prepared to assist small firms to cope Also, employers and noble Lords who raise that point should appreciate that the WFTC supports small firms, as they are the very employers who complain that they cannot afford high wages. They should welcome the WFTC as a subsidy from the taxpayer.

The CBI's second point might have a little more validity but only in one respect. The confederation suggests that all employees be given the choice of receiving the credit directly from the Inland Revenue. That might import an element of complexity that the Government would not welcome. The only employees to whom that facility might be extended are lone parents. Many single parents might want a direct payment, believing that that is more likely to preserve confidentiality. I welcome the views of the Minister.

The CBI also suggests that employers should act only as agent for the Inland Revenue and should not be expected to become involved in assessment of entitlement. I gather from the Minister that that is to be the position. Employers will simply be agents. To some extent that deals with the point raised by the noble Lord, Lord Higgins, when he asked about the situation should there be more than one employer. I understand that the Inland Revenue will do the calculations and will be responsible entirely for assessment, and will do so in relation to the one employer via whom the tax credit is to be paid. I do not see that there is a great deal of difficulty about that.

The Bill also deals with the disabled person's tax credit. I believe that there are Members in this House far better able than I am to deal with issues affecting the disabled, notably my noble friend Lord Rix. Suffice it to say that it appears to me to be an improvement on the present situation. However, I wish to raise one point. The DPTC takes the place of the disability working allowance. I supported that when it was introduced by the former government. But there was always a problem. I believe that it had the lowest take-up of any benefit. I should not like that to happen with the new arrangements. What procedures are in hand to ensure that there will be a better take-up this time round? I understand from the Minister that there is to be a fast-track procedure. Is that intended to deal with the problem of low take-up? It is to be hoped that it will do so.

Finally, perhaps I may say how pleased I am that lone parents applying for the WFTC or DPTC will not be required to co-operate with the Child Support Agency in seeking maintenance from the absent parent. There will be no penalty for non-cooperation. That will allow child support to be used for the benefit of the children, which is what was originally intended.

Altogether it is a Bill to be supported. It has to be taken in conjunction with the introduction of the minimum wage, other measures announced in the Budget and the drive by the Government to increase the number of families with sufficient income to meet a low cost but acceptable budget. There will still be families below that level and that is regrettable. It means that there is still much more to do. But the Bill is a worthy step in the right direction and should be supported.

6.2 p.m.

Lord Swinfen

My Lords, I welcome the Government's efforts to make people feel that it is better to earn through work, even if there is a top-up on their earnings, rather than to survive on benefit. I welcome the reduction in the tax burden on families which will result from the introduction of the working families' tax credit and the disabled person's tax credit, and the attempts being made to deal with child poverty. However, I believe that the proposals as they stand have a number of major weaknesses.

The WFTC does not treat all families even-handedly, as has been mentioned. Married couples will be disadvantaged. They will receive less credit than other families. There is positive discrimination against marriage. That, together with the loss of the married couples allowance, calls into question the Government's claim that they support marriage.

The working families' tax credit helps families who need and can afford paid childcare but gives no additional help to families who pay for childcare by sacrificing income so that they can care for their children themselves.

The noble Lord, Lord McNair, raised the difference between the DPTC and the WFTC in the aggregation of a couple's income and savings to restrict the amount of credit. He pointed out that that point had been raised in the Commons but had not been answered. Will the Minister answer it this evening? Statistics from the Department of Social Security suggest that typically a family of four (two parents and two young children) will be poorer than a family of three (a lone parent and two young children). A fair system should take account of the second adult both for fixing the basic credit as well as for calculating family income. The DPTC also introduced in the Bill contains an enhanced credit when there is a second adult in the family. That is also the case with the income related benefits. Since the second adult has the same expenses in both cases there is a compelling case for bringing the WFTC into line with the DPTC.

My noble friend Lady Knight raised the question of marriage. I welcome the additional help being given to lone parent families, but I am concerned that once again married couple families have been discriminated against. That is in sharp contrast to the policy expressed in the Green Paper Supporting Families.

The working families' tax credit proposals are also defective in that they give more credit to families who pay for childcare than to those who do not. Some parents will wish to work and attach great importance to the availability and affordability of professional childcare. Other parents attach equal importance to caring for their children at home. Giving both groups of parents a genuine choice is important. As the consultation paper Meeting the Child Care Challenge states, It is up to parents to decide what sort of child care they want for their children. This is not a matter for Government. But it is Government's responsibility to ensure that parents have access to services to enable them to make a genuine choice. This means good quality, affordable child care for parents who wish to work outside the home, and support for parents … who look after children". The skewing of the working families' tax credit in favour of one group of parents does not enable parents to make genuine choices, in particular those on low incomes. There is a built-in incentive not to care for children at home. The WFTC must deal with both groups fairly and needs to recognise the position of parents who are in effect paying for their childcare by not working, as well as those who are using professional childcare facilities. It would also be interesting to know how the behaviour of those children changes when they are looked after by their own parents at home in, I should have thought, a more loving sense of care than those for whom there is always paid help.

There is also a good case for bringing into line the treatment of disabled children under both working families' tax credit and disabled person's tax credit. Under the DPTC a disabled person who has a disabled child receives an additional credit. There is no similar credit under the WFTC. The needs of a disabled child should surely receive the same recognition whether or not the parent is also disabled. It is the child who is disabled in this instance and not the parent.

The noble Lord, Lord Rix, said that childcare which is eligible for assistance through the tax credit includes types of care that can be registered. Childcare that is not registered includes services for children over the age of eight and care in a child's own home. That has meant that disabled children who are more likely to need services in their own homes, and higher up the age range, have not been able to get registered services and so would not be eligible for the childcare credit. Care in their own home may be the only practical option for disabled children, in particular those who are severely disabled, if their homes have already been specially adapted to meet their special needs. A recent report by the House of Commons Social Security Select Committee recommended that eligible childcare should be extended to disabled children where childcare could be verified. The Government's recent amendment to the Bill at Report stage in the Commons allows for childcare to be eligible for the credit where provided by an accredited organisation. That is referred to in the House of Commons Hansard of 17th March at col. 1140. That will help parents of children over the age of eight to qualify for childcare tax credit. It is unclear whether it could help parents of disabled children who may be paying for childcare in the child's own home. Can the Minister clarify that point?

Passporting was mentioned by my noble friend Lord Higgins and the noble Baroness, Lady Turner. Currently, people who receive family credit or disability working allowance can also be eligible for other assessments. They include national insurance credit; social fund maternity and funeral payments; help with home repairs and energy efficiency; free legal advice and assistance; assisted prison visits; weekly payments of child benefit; fares to hospital; free prescriptions; and help with the cost of dental treatment and glasses. Will the Minister when replying to the debate confirm that those passported benefits will still be available to the recipients of the new credits under the Bill?

The national insurance credit is likely to become increasingly important for disabled workers on low earnings. I understand that the lower earnings limit for employee national insurance contributions is £66 a week. Can the Minister confirm that people earning below that level will also receive a disabled person's tax credit and requalify for incapacity benefit should they need to do so? Changes to the national insurance contribution conditions for incapacity benefit proposed in the Welfare Reform and Pensions Bill will mean that only people with a recent record of actually having paid two years' contributions will be able to qualify for incapacity benefit. While there is a two-year linking rule for people claiming the credit, the question remains for people who may need to reclaim benefit after more than two years on credit.

My final point was raised by my noble friend Lord Skelmersdale. Why cannot the tax credit be paid through the PAYE tax coding? It would make far less work for employers and would mean that other people working in the same firm would not know that a particular employee was in receipt of a tax credit.

6.12 p.m.

Baroness Fookes

My Lords, the noble Lord, Lord McNair, who is no longer in his place, referred to himself as an ugly duckling in a lake of swans because he did not pretend to have great expertise. I have a fellow feeling and in this case must also class myself as an ugly duckling because I do not pretend to be an expert in tax law or social security.

However, during my long years in another place I had considerable experience in dealing with the problems of constituents; some of the people who would be covered by social security. My noble friend Lady Knight will agree that such people are often perplexed by what appears to be a jungle of regulations. They are even more concerned when the regulations change. Therefore, I am very wary of changes unless they can be proved to be substantially better than that which they are replacing.

On that test, the Tax Credits Bill fails. We already have a reasonable system which has bedded in very well. If the Government were minded to make it more generous, they would have been better to have done so and not changed the system. However, it seems that the Government are obsessed with modernisation, with change and with tinkering with systems. Nothing, but nothing, must be allowed to remain the same. I see many drawbacks in the system brought before us in the Bill. Other noble Lords have described them in detail, so I shall deal only with those which I consider to be of importance and about which I feel strongly.

I deal first with the issues surrounding the woman, the wife, the mother. The great merit of the present system is that the benefit goes to the mother without argument. As other noble Lords have indicated, once a choice is introduced problems arise. There are severe cases in which women are knocked about by their husbands but remain with them or, if they move into a refuge, return to them. What kind of true choice will they have? I would lay money on the man being allocated to receive the money and that it will not go to the children in the way that it does now. I have great fears about that and feel very strongly that the move is wrong.

It is also a matter which perplexes me, given that the Government have set great store on the role of women. They have instituted a Minister for Women in this House and in the other place. I had understood that one of their tasks was to put through a sieve all impending government legislation in order to ensure that it did not disadvantage women. The sieve must be very wide meshed because there is no doubt that in this case women will suffer as a result of the change. My noble friend Lady Knight dealt with the issue of marriage so I shall not dwell on it, but I utterly concur with her remarks.

I, too, am concerned about the burden on employers, in particular small employers. I come from the West Country where virtually every organisation is small, as the Minister will be aware. I can see real problems for small businesses because this is not the only burden that will be laid upon them. In addition to their current burdens will be the directive limiting hours and the minimum wage legislation. Whether they are right or wrong, they are additional concerns for small and large businesses to bear. I believe that these provisions will be too much and are unnecessary when it would be possible to introduce another system which did not impinge on employers in the same way.

As the noble Baroness, Lady Turner, observed, the CBI has asked for an exemption. She considered it to be impractical because of the number of small firms. I should like the Government to examine this matter. I think that it can be clone, but if it is impractical it reinforces my view that we should not be going down this road. I shall be interested to hear the Minister's comments on that when replying to the debate.

Finally, I suggest that we take very closely to heart the words of Frank Field. I believe that my noble friend Lady Knight was in error in describing him as a spokesman. I believe that he has been blotted out of the government book of life. Nonetheless, he has more experience than most in examining these issues, and when he says that the new system contains serious errors and faults I take it very seriously and I hope that the Government will do so too.

6.18 p.m.

Lord Craigmyle

My Lords, yet another ugly duckling quacks up!

I welcome the attempt to lift us out of the iniquitous morass into which our tax and benefits system has sunk. It was only when I heard the Minister laying out her stall so well this afternoon that I was struck by how complex the Bill is. The noble Baroness spoke of incentives and "penal rates of deduction". She said that people are reluctant to take work which does not pay.

The WFTC carries its own incentives and disincentives. It will induce couples away from stable relationships into casual ones—something which I do not think the Government are hoping for. I will spell out some of the characteristics of this credit.

Married people will become more disadvantaged. There has been a shaking of heads on the Front Bench when this issue has arisen before, but it is a genuine concern. Their incomes will be added together. That is not something new to the Bill, but it is compounded by it. It is absurd. Two people eat more than one person, even without children to feed. They already pay more council tax and suffer from the loss of tax bands if they lose an income; and now this, on top of all that.

The Minister echoed the words of the Paymaster General that, no family with children will pay net income until their earnings exceed £235 per week". If the couple has savings of £4,000 each they miss the credit entirely, no matter how low their income. It appears that they are being told that if they split up, dissipate their savings and dump their children in childcare, they will be a better family. I disagree. If they do, the mother can then claim maintenance, which is disregarded for the purposes of the credit. The Minister is right to be proud of that because it is very sound. But reconciliation between the couple will effectively be taxed, as their incomes will be assessed together once more. Working families' tax credit puts another brick in the wall which I call marriage tax.

I make a simple prediction: the effect of working families' tax credit will be to drive more families apart and to dissuade other couples from formalising their relationships. This will be sad for the couples: nobody aspires to raise children within casual or unstable: relationships. For the children this is a disaster. The best they can hope for is that their parents have the wit to defraud the system by pretending to be separated, which is another advantage of not being married.

A number of changes could be made to the proposals. A useful change would be to give a second credit to the second adult. This would bring them in line with the DPTC, and the Bill would then be more consistent. It would treat families more even-handedly. I am not advocating any kind of assistance to the two-parent family, although that might be a good idea; I am just asking that they should not be penalised any more than they already are. Working families' tax credit gives us more nails with which to hammer down the lid on the coffin of marriage. I fully expect it to be drastically amended before the Bill passes.

6.25 p.m.

Lord Astor of Hever

My Lords, this debate has shown, with noble Lords' characteristic expertise and insight, why the Bill is so fatally flawed.

I am sorry that the noble Earl, Lord Russell, has not preceded me in winding up tonight. From these Benches, we wish him a speedy recovery. Having read the speech of the honourable Member for Northavon, Steven Webb, at Second Reading in the other place, when he described the Bill as a fraudster's charter, I was expecting some fireworks from the noble Earl.

I much enjoyed the speech of the noble Lord, Lord Rix, who fights so hard for the disabled. His wife, who gives him so much support, deserves a very happy birthday party tonight.

There are ranged against the Bill many independent experts, large and small businesses, and other informed organisations which are urging the Government to think again. As my noble friends Lord Higgins and Lady Carnegy said, the working families' tax credit is not really a tax credit at all, but a transfer payment made through the wage packet. One third of the current recipients of family credit, against whom we must benchmark, do not pay any tax whatsoever, and of the remaining two-thirds, only 9 per cent. of their family credit could be offset against a tax liability.

All that the Bill seeks to do is alter the means of transfer, while clouding it in the grandiose rhetoric of welfare reform. The only real winner will be the Chancellor of the Exchequer who, it would appear, is looking to bring all welfare spending under the auspices of the Treasury.

The Government seem determined to ignore the evidence from other comparable schemes that have been introduced in Canada and the United States. This point was touched upon by the noble Earl, Lord Buckinghamshire, and the noble Lord, Lord Skelmersdale. The scheme in Canada, the working income supplement, which Martin Taylor, the architect of these proposals, admitted he had not even looked at, has been replaced by a benefits-based system because of wholesale abuse.

The American evidence is equally damning. There, the earned income tax credit (EITC) has been shown by the IRS to encourage taxpayers to claim over 4.4 billion dollars more than they were entitled to, while federal spending on the EITC ballooned from 1.7 billion dollars to 18 billion dollars from 1986 to 1996; and all this at a time of unprecedented growth throughout the United States economy.

The potential for fraud under the working families' tax credit has already been mentioned by my noble friends Lord Buckinghamshire, Lady Knight and the noble Lord, Lord Craigmyle. If a system is set up that can be milked, like this one, someone will milk it.

My noble friend Lady Knight told us that the Government's leading welfare reform thinker, the right honourable Member for Birkenhead, Frank Field, said that, the whole of the family tax credit venture is fraught with great dangers … it offers huge bonuses for dishonesty, strengthens employers' hands over working people and encourages low-paid jobs". Moreover, he said: It takes pressure off improving productivity and increasing the scope of real wages". All that from a man whom the Government charged with thinking the unthinkable over welfare reform. In fact, what he thought was so unthinkable that the Prime Minster decided that both he and his boss were unemployable.

The Select Committee on Social Security also expressed concern at the potential for fraud if priority was placed on prompt payment at the expense of rigorous checking of eligibility.

I turn now to the "purse-to-wallet" argument which has been voiced by many leading commentators. The working families' tax credit penalises two-parent, single-earner families as they do not qualify for the childcare tax credit. It fails to take into account the costs of bringing up a child at home and only takes account of another adult in the family purely as a means of reducing the credit. The comparable experience of the American EITC was that it encouraged couples to keep their relationships formally unrecognised. So much for the new party of family values.

My noble friends Lady Knight and Lord Swinfen enlightened us on the Government's contempt for the institution of marriage, having promised so much. Our major concern is that there is a strong possibility that by paying the WFTC through the pay packet, the money will not reach the mother and, therefore, the family. My noble friend Lord Buckinghamshire made the point that a side effect of the Bill is that those who need the money most—the mother and child—may well receive less. The noble Baroness, Lady Turner, also emphasised that point.

The payment method is a serious issue where couples are involved and one result will be to set husband against wife, as my noble friend Lord Skelmersdale said. Figures show that within family credit, 308,000 families have the man as the principal wage earner. Within that group, 93.5 per cent. of women had no earnings.

Under these proposals, the £900 million in WFTC could go directly to the man, since the wage earner is the default recipient. As Frank Field said, women will have to negotiate with their partners to get back the £900 million that they currently receive. Despite the Government's assurances that the Inland Revenue will step in to investigate, the Low Pay Unit and the TUC have both voiced clear criticisms of that approach.

In addition, research by the Joseph Rowntree Foundation found strong opposition among women to payment through the pay packet since they regard the current system as being clear, direct and guaranteed for their weekly budgeting. Many women suffer an unequal position within a relationship. Indeed, violence in families is a huge problem, as my noble friend Lady Fookes, with her great experience, pointed out. The same research showed also that men within the same couples were also opposed, on the grounds of the invasion of privacy by employers administering the arrangements.

In Committee, we shall wish to consider how WFTC should be made available. As matters stand at present, lone parents will not have the option of choosing how they receive WFTC but we feel that they should be allowed to choose. If they prefer not to have it in the pay packet, they should have the option to collect it from a post office. Being paid through the wage packet inevitably requires the employer to intrude into the employee's private affairs which causes people, quite rightly, to be concerned.

The required close monitoring of employees' and their spouses' benefits could lead to an adverse adjustment of salaries. My noble friend Lady Carnegy made the point that unscrupulous employers could use access to information about their employees' and their spouses' benefits to take advantage of the more vulnerable people. On the other hand, family credit does not cause such problems as, according to the DSS's own figures, only about one-third of employers know that their employees are in receipt of the benefit.

The issue of stigma has been mentioned by my noble friend Lord Buckinghamshire. The Government claim that as the WFTC is no longer seen as a benefit, that will reduce the stigma attached to family credit. That is contradicted flatly by the Institute of Fiscal Studies and the CBI. The Institute of Directors states that it will be quite likely that an employee who receives, and of whom it is known that he receives, benefit in the workplace will be stigmatised. Employees do gossip.

The notion that it will reduce the stigma of family credit and encourage people to take lower-paid jobs is disputed even by the TUC which said, in its 1999 Budget submission: Family credit has … enhanced job security for many people in low paid jobs by delivering financial assistance in a direct and timely fashion". After all, levels of take-up are 70 per cent. by case load and 82 per cent. by expenditure. The CBI and the Joseph Rowntree Foundation have both stated that the stigma argument against family credit is weak.

Perhaps the final comment on this matter should go to Martin Taylor, in his evidence to the Select Committee. As my noble friend Lord Buckinghamshire said, he admitted that there was no evidence to criticise family credit on the basis of stigma, saying that hard and fast evidence … is difficult to come by". Lastly, I turn to one of the most powerful arguments against the Bill—that is the financial and administrative burden that it places on business. That point was made eloquently by my noble friends Lady Knight and Lady Fookes. The draft regulatory impact assessment estimates that the WFTC will cost employers £103 million per annum to operate, with at least an additional £43 million in non-recurrent set-up costs.

It is the impact on small businesses—and many small businesses are very much on the breadline—that is of particular concern. Over the past 15 years, small businesses have created 2 million new jobs and they currently employ 50 per cent. of the private sector workforce in the United Kingdom, with the vast majority employing nine employees or fewer. In a small firm, the owner-manager often does the calculations on the kitchen table.

The CBI, the Institute of Directors and the Federation of Small Businesses have all criticised strongly the impact of the WFTC on business. That additional huge amount of hassle could well mean that benefit claimants are either not taken on or laid off as the Government continue to choke business through more and more regulation. It may make some employers prefer employees who are not claimants, rather than employing claimants who may be an administrative burden. The more that business people are dealing with government work, the less they are dealing with their own and creating new employment opportunities and profits. Moreover, concerns as regards privacy and innocent mistakes in calculation or receipt, resulting in benefits going to the wrong people or not being paid on time, may well sour industrial relations in that vital economic sector.

I have also received a number of representations from the National Farmers Union which is extremely concerned about the impact of the Bill on its members, many of whom have already suffered hugely under this Government. They question seriously the disproportionate burden of costs and administration on farmers who employ comparatively few people but are heavily reliant on casual and seasonal labour.

The cash-flow position of many employers will be worsened as they will effectively be lending the Crown the money to pay the benefits, with each loan outstanding for between two and six weeks, depending on the pattern of wage payments. The Institute of Directors has described the cash-flow problem as "massive" and the Chartered Institute of Taxation is extremely concerned about the impact on the solvency of businesses.

On that point, the Select Committee on Social Security recommended advance payments to ease the cash-flow problems of small businesses and the reimbursement of administration costs for those with only a few employees. Therefore, I ask the Minister whether she will consider those two points.

The Government increasingly seem to view an employer's payroll as their own unpaid executive agency whose role is to distribute and collect state transfer payments. In addition to the potential burden of the WFTC, there are proposals to use employers for student loan repayments and stakeholder pension contributions. Those have been reviewed and criticised at length by the British chambers of commerce.

Where will it all end? Will the Government make a commitment, for the benefit for the business community, that no more social security payments will be transferred to the payroll during the lifetime of this Parliament?

The draft RIA suggests that it will take an employer half an hour to read a book on the WFTC and understand it. For this purpose, the employer's time is valued at only £10. People who are not good at payroll to start with—the majority of small employers—are not going to learn the system in half an hour.

What is the point of businesses even trying to be successful and competitive when the Government are imposing ever more burdens on them and diverting their valuable time and resources? However well intentioned the WFTC might be, it is merely adding to the pressures that make employers administrators and not businessmen.

I believe that we should see the WFTC in a wider context for the business community. This Government pledged in their manifesto, to promote dynamic and competitive business and industry at home and abroad". Instead, we have a Government who are ignoring the pleas of both large and small businesses to end the burdens being forced upon them.

The Bill does nothing to serve the people that it most purports to help. It is ill thought-out and ill planned. This is not just the view of the Opposition; a formidable array of specific and general criticisms of the working families' tax credit is coming from many organisations which, unlike the Government, understand the practical implications of the Bill and the harm it has the potential to do.

We, on this side, are committed to encouraging people to work and to ensuring that work pays, but in our view the Government's Tax Credits Bill will not achieve that. Like the party of the noble Lord, Lord Goodhart, we shall seek important improvements in Committee.

6.41 p.m.

Baroness Hollis of Heigham

My Lords, we have had a wide ranging and detailed debate. If I were to seek to do justice to all the points raised, I would keep your Lordships here long past the dinner hour, but I am sure that that would not be to the advantage of the House. If your Lordships will allow, rather than take up the time of the House now, I will follow up, as I was invited to do, points of detail about Northern Ireland, the forms, regulations—yes, they will be published before we go into Committee—agriculture, and methods of payment for casual workers, by correspondence which can be circulated, otherwise the time of the House will be taken up inappropriately.

Listening to your Lordships, the issues we have heard seem to cluster into three main blocks of concerns. First, there were issues which related to the recipients of working families' tax credit, such as dependency, means testing, purse-to-wallet, the attack on marriage and the disabled persons' tax credit. I shall seek to address that bundle of issues, as to the effects on the employee, in roughly that order.

Secondly, there was a set of issues which concerned employers. I refer to the burden on business, in particular, which became a shorthand for issues such as cashflow, payroll costs, the question of whether there should be an exemption for small firms, and issues of privacy. That second bundle of issues concerns the employers' position.

Finally, there seemed to be a set of issues concerned with the position of Government. One of these was a straightforward question which I was asked by the noble Lord, Lord Higgins, about accountancy methods. The noble Earl, Lord Buckinghamshire, raised issues of comparison with America and the Canadian experience. The noble Lord, Lord Astor, raised issues of comparison with other countries in terms of burdens on business.

If your Lordships will allow, I shall seek to answer the queries in those three forms: the questions affecting employees and families; the questions affecting employers, and finally the wider remarks on the Government's position.

The noble Lord, Lord Higgins, opened the attack by saying that this is not a working families' Tax Credit Bill but an Inland Revenue "handout" Bill. I cannot put it better than in the following quotation: One advantage that we wish to establish in proposing that family credit should be paid with wages is a link between the credit and work. Sometimes, it is too easy for someone considering taking a job, perhaps at relatively low wages, to consider simply the wages and the deductions from pay for tax and contributions. Another advantage is that payment with wages represents a step towards a closer alignment of the tax and benefit systems, a step which I am urged constantly to take".—[Official Report, Commons, 19/5/86; col. 148.] I think that puts the Government's case pretty well. Those comments were made by the then Mr. Fowler on 19th May 1986 at Third Reading of the Social Security Bill in the Commons introducing family credit, seeking to have it paid through the wage packet to integrate tax and benefit and urging that people should recognise that the point of entry wage would determine people's movement into work rather than the so-called stigma of what was then the family income supplement system. I know that the noble Lord, Lord Higgins, wishes to intervene.

Lord Higgins

My Lords, I am grateful to the noble Baroness for giving way. That does not, in any way, make this a genuine Tax Credits Bill. It is quite beside the point. If I understand her correctly, she is quoting from the experience at that time. There may be joy in Heaven about one sinner who repented, but what actually happened in the event?

Baroness Hollis of Heigham

My Lords, in the event, with considerable reluctance, the Government decided to pay family credit through the woman. However, in taking the issue through the House of Lords, the noble Baroness, Lady Trumpington, said: The case for closer alignment of the tax and benefit systems has been strongly advanced …"—[Official Report, 23/6/86; col. 41.] She went on to say that the Government would continue to consider it and that they would wish to return to it as soon as possible. Unfortunately, the Government of the day did not do so and we are now taking that mission forward.

Lord Higgins

My Lords, the moral of this story is clear: when there is sufficient opposition on these issues, it is a good idea to take account of them. Therefore, if the noble Baroness is now saying she is doing that, she surely ought to take account of the considerable opposition being expressed about her Bill in this form.

Baroness Hollis of Heigham

My Lords, the opposition was coming primarily from business which, as ever, resisted the minimum wage and fairness at work procedures. It is resisting the WFTC and resisting taking responsibility for statutory sick pay and statutory maternity pay. It is resisting anything that can be regarded as the proper responsibility of business. It was to that lobby, in particular, that the Government of the day deferred though acknowledging that the arguments were for exactly what we are suggesting; that is, a tax credit system integrated through the tax system in order to encourage people to work.

The Government of the day responded to the fears of business, as it always does, to avoid taking proper responsibility for their employees. They failed at the time to support a minimum wage and the like. We are in no such position. We believe there is a proper role for Government which is to regulate the playing field. We believe there is a proper role for employers and employees and that we will get that balance correct. It was not done under the previous Government. We believe that we are now in a proper partnership of regulation and co-operation in which the rights of employees, as well as the responsibilities of employers, are properly protected. I hope that the Government will get the support they should, in that case, from the Opposition parties.

The noble Lord, Lord Higgins, made much of the point about increasing dependency. On that he was supported by the noble Lord, Lord Goodhart. My noble friend Lady Lockwood responded to many of these points. The problem seems to me to be real but not a party one. During the 1980s there was an increase in dependency on means-tested benefit for two reasons: first, the huge increase in housing benefit because the previous Government chose to deregulate rents; secondly—and this we fully supported—the increase in means-tested disability benefit. The problem then comes that if benefits are tapered because they are means tested, there is continuously the dilemma that the noble Lord, Lord Goodhart, spelled out to your Lordships' House. If there is a shallow taper, people are kept on benefits longer. If there is a steeper withdrawal rate, a steeper taper, there are very high deduction rates, beyond 90 per cent. or even 100 per cent. There is no right answer. Any government, any administration, are balancing the shallowness of the taper and therefore increased dependency on those benefits and a very high withdrawal rate and therefore strong disincentives to increase the earnings at work.

The distinction we made at the time, which is why we were unhappy, particularly with the extension of family credit—the earnings top-up quoted by the noble Lord, Lord Skelrnersdale—is that we support and continue to support a top-up to low earnings where the person earning is at some relative disadvantage in the labour market. For instance, they may have a large number of children, may be disabled or as a lone parent may have high childcare costs. Any one of those factors might keep that individual out of the labour market. The labour market does not reflect the at-home domestic costs; the wage is paid irrespective of whether the man has three children, one or none. Therefore, in our view it was perfectly right—we supported it throughout—to introduce family credit or in-work benefits provided they were underpinned by a minimum wage. We objected then and continue to object to using a wage subsidy, to subsidise not the employee who is at a disadvantage in the labour market, but the employer who is paying a sweated wage.

It is still the case today that the median wage of a lone parent—the average wage of a lone parent—is below the new minimum wage of £3.43. Indeed, the statistics show that over a three-month period, of 24,000 lone parents going from IS to family credit, around two-thirds were being paid below the new minimum wage. Therefore family credit was effectively acting as a subsidy to poorly paying employers and sweated employers rather than, as we believe it should, helping those who are more marginal to the labour market to enjoy the same opportunities for work as the rest of us expect to enjoy.

Of course, by definition, given that we are producing a support for those on low pay who have added labour market costs, we will inevitably have the problem that those who come down from the higher rates of MDRs, or withdrawal rates, will "bunch" the 60 per cent. rate; that is true. Nonetheless, under WFTC, lone parents and low earning couples will all be better off than by being on family credit. So even though there will still be high withdrawal rates—I agree that 60 or 70 per cent. is high—it is infinitely better than the current withdrawal rates of 80 or 90 per cent. and higher. At the moment 115,000 have withdrawal rates of over 90 per cent. under family credit. Under WFTC that will come down to 15,000 so we will be significantly improving the position.

The second bundle of arguments raised concerned the issue for employees of "purse-to-wallet". The noble Lord, Lord Higgins, seemed to think that we should nut be allowing the couples to whom it is to be paid to have a choice, because it will cause a dispute and that would be unfortunate. But that was the argument by which Gladstone, many years ago, would not give married women the vote. It was said that if she disagreed with her husband there would be a dispute and therefore it was not given to married women. That seemed to privilege single women, but as single women included people like prostitutes, lone parents and so forth, they could not be given the vote either. As a result, women failed to get the vote for the next 40 years on exactly the same argument as that being applied by the noble Lord, Lord Higgins. I do not know if he wishes to support that position.

But I have greater faith in marriage. Some of the same commentators today—for example, the noble Baroness, Lady Knight—on the one hand were saying that we should be supporting marriage, but on the other hand were so worried about the misappropriation of money within marriage, the violence within marriage, the unreasonable behaviour of men within marriage that I was sometimes a little baffled to understand why they should want to support marriage at all. It was an extraordinary and disproportionate set of arguments.

We are saying that lone parents in work will receive the benefit through their wage packet. Where couples are both earners, it will be paid through the wage packet to the higher earner. If there is a couple in which one person is at home and one is not, they will have a choice as to whom it is paid. We hope, for the most part, it will go to the man, because the crucial point for our purposes is the entry wage at which he goes into work. If they choose for the woman to be paid, that will be their choice. If there is any dispute between them, the presumption will be in favour of the parent who cares for the child. That is the protection for those situations where a woman and her children might otherwise be at risk.

Lord Goodhart

My Lords, I am grateful to the noble Baroness for allowing me to intervene. Can she assure me that if there is a dispute that provision in relation to the fall-back default will be included in regulations? It does not appear to be in draft regulations at present. Will she confirm that it will not be dealt with, as appears to be proposed in the Inland Revenue memorandum, by the Inland Revenue simply disregarding its own regulations?

Baroness Hollis of Heigham

My Lords, as I understand it, it will be dealt with under the general responsibilities of the Board of Inland Revenue's responsibility for the care and management of this procedure. It has already been described to that effect by my honourable friend the Paymaster General in the other place, and therefore the words in Hansard are to be taken to convey the same weight.

Lord Goodhart

My Lords, as it says in the memorandum that it will accept the application even though technically it would not be effective, it will be disregarding its own rules.

Baroness Hollis of Heigham

My Lords, it will accept the application within the broader framework of its overriding responsibility for care and management. That is the position of the Inland Revenue. That is the position which validates its overriding responsibility.

To put this in context, just over 1 per cent. of family credit forms are returned now because they are not completed with both signatures, and in almost all cases that is an oversight as to the two people not signing. The number of disputes from the experience of family credit where the same rights apply is absolutely minimal; indeed, the officials could barely remember a case. I doubt therefore that this will be the problem that people perceive it to be.

Nonetheless, I was pressed as to whether lone parents should have a choice as to whether the working families' tax credit should, as with family credit, be paid at home or whether it should be paid through the wage packet. We are unapologetic that this is meant to be a support for wages in the same way as outlined by Sir Norman Fowler. We accept that. We know that on average people's wage on going into work is only two-thirds of the median wage for that job that they will require four, five or six years down the line.

The research in the 1996 report by Shaw—Moving Off Income Support: Barriers and Bridges—indicates that the problem is not childcare, loss of individual benefits, the hassle of moving into work or the insecurity of work; it is the low level of entry wages. Just to remind ourselves, the average hourly wage for a man is almost £7, but his entry wage is only just over £4.50. The same applies to women. A woman's average hourly wage is at or about the minimum wage level of around £3.50 or £3.60. It is that point-of-entry wage which determines people's calculations of the "better off by". That is why the benefit needs to be brigaded with the wage so that it is seen as a work support benefit and not an income support benefit, which is what it will continue to be perceived to be if it is paid at home.

I was asked questions about childcare costs and why we went for the figure of £200 million rather than the £4 billion that the IFS calculated. As your Lordships recognise, the IFS figure was calculated on everybody having maximum childcare and all of it going through to registered childcare. At the moment around only 5 per cent. of families on family credit take advantage of the childcare disregard, and the total comes to between £30 million and £40 million. We felt that by multiplying that figure six-fold it would probably be broadly right. All our research shows that the majority of people going into work still prefer informal arrangements with relatives, family and friends. We expect that to continue. But we also expect there to be an increase not only in the demand for and supply of registered childminders for younger children, but for support for children over the age of eight. We believe that figure to be about right; if it is not, we shall obviously need to come back and adjust it. That seemed to be a more realistic view of the world than some of the assumptions lying behind the IFS.

I was pressed by the noble Lord, Lord Skelmersdale, and others, about the disincentive for the two-parent family—the second partner would drop out of work because it is a means-tested benefit. One has to recognise that that is a problem with any household-based means-tested benefit such as family credit. But then we had complaints from the other side also that the single adult working family who was not eligible for the childcare tax credit was equally being penalised. On the one hand the noble Lord, Lord Skelmersdale, complains that the two-earner couple will be penalised and the woman will drop out of work; and on the other that the single-earner couple will be penalised. The Opposition cannot have it both ways, though they may try.

Lord Skelmersdale

My Lords, cannot the noble Baroness understand that it is quite possible that both will happen and that both are wrong?

Baroness Hollis of Heigham

My Lords, I do not see how that can be entirely consistent. The point about the childcare credit seems to me to be very straightforward. We are saying that WFTC supports low earners. If to earn that low pay a person needs the assistance of childcare benefit, we need to help subsidise it, otherwise, the lone parent will stay on income support. Alternatively, if, for example, there is a couple in work, the woman may not otherwise be able to afford to work because she would have to care for her children.

Is the party opposite asking, for example, that a mother caring for her child should receive payment for it through the WFTC? Are we really talking about wages for housework; in other words, wages for child home care? Alternatively, are noble Lords opposite saying that lone parents who cannot afford to work because of their childcare costs should not receive it because they will, somehow, be relatively more privileged than a couple where the mother stays at home and does not work? I give way to the noble Baroness.

Baroness Knight of Collingtree

My Lords, I am grateful to the Minister for giving way. However, she seems to be in some doubt about what is in our minds. Other countries, notably France, recognise the advantage to the country of having the mother staying at home looking after the child and take account of the cost to the mother of doing so. What we are doing in this Bill is failing to take any account of the cost to the mother; we are simply paying her to tell someone else to look after the child.

Baroness Hollis of Heigham

My Lords, it is perfectly proper to ask that there be decent and adequate support for children. That is done in this country through child benefit which is a benefit that can be received and can be taken by someone into work. We are going up to £15 for the first child and £10 for the second child as of next April. That is the appropriate benefit. The WFTC seeks to do something rather different: while supporting families, it will also produce an incentive for work. To pay benefit to a woman staying at home looking after her children is not a work incentive. The WFTC is concerned not only with supporting families; it is also a work incentive. If childcare costs are so high that there can be no work incentive, as may be the position for a lone parent, it is reasonable that those costs should be met in part. That is the philosophy behind it.

We are not in any sense saying that a parent who chooses to stay at home and look after her children is doing an inferior or a second-rate job. That is not the case at all. However, that is done through other methods in the tax and benefit systems and not through the WFTC. 1 do not think it reasonable to ask the WFTC to carry the whole burden of social security. It is complementary to other areas of social policy and social support, but it is doing a separate job which is to ensure work incentives while supporting families at the same time. Indeed, projects like the Sure Start programme and the increases in child benefit will give the kind of support to children that, like the noble Baroness, I would like to see happen.

A third set of questions associated with employees were those relative to DPTC which were raised by the noble Lord, Lord Rix. We do expect disabled people's take-up of this benefit to double compared with the take-up of DWA. I am glad of its welcome. We accept many of the difficulties identified by the noble Lord. He raised, first, the question of whether the 16-hours' rule was a reasonable one for disabled people who might be capable only of very limited work. This is an issue which concerns us. It has been suggested by RADAR and its director, Bert Massie, that we should perhaps consider whether we should be piloting some possibilities in that respect. However, at the end of the day the DPTC, like the WFTC, is about a work-support benefit. It is probably not unreasonable to think that 16 hours is the point at which one is talking about a commitment to work. However, when talking about fewer than 16 hours, a disabled person would be able to keep the first £15 of what he or she earned or, indeed, might be eligible for some £58 on therapeutic earnings. We could perhaps look into the matter, but if one slid below that, I believe that the line of what counts as being in work supported by benefits, as opposed to being on benefit supported by some modest earnings, becomes very blurred.

The noble Lord raised points about the position of a disabled child. In a family claiming DPTC, a disabled child will of course qualify for two children's tax credits—one of the standard type and the second for his or her disability. We are also ensuring that a disabled child will be eligible for childcare up to the age of 16.

The noble Lord, Lord Swinfen, asked about the two years' contributions in terms of incapacity benefit. If someone in work is getting tax credit, he is therefore also acquiring his right to continue to claim IB. Moreover, the linking rules continue to apply. So I do not think that the problem envisaged by the noble Lord should occur. However, if the noble Lord has any further difficulties in that respect, perhaps he could write to me and I would then seek to explain the position further. The double combination of being in work and continuing to build up your credits for IB purposes and contributory credits together with the linking rules should protect against the situation that worries the noble Lord.

The second bundle of issues raised related to burdens on business. I believe that the noble Lords, Lord Higgins and Lord Astor, together with others, complained, first, about the duty of confidentiality and stressed the worries about privacy that employees might: face as regards an employer. I hoped that I had addressed that issue. One has only to look at the family credit details, which I just happen to have in front of me. Such information shows that the amount of work involved and the amount of detail that the employer has to have about the employee is already quite considerable. I am not trying to suggest that some of that work will not continue with WFTC. However, a person's tax credit will vary not just because he may be holding a second job but also because of what his partner may be doing. For example, she may be in work; she may be changing jobs; she may leave him; they may have an additional child; or, indeed, they may have additional childcare expenses. All of those considerations can affect the amount being paid through the working families' tax credit. I believe that it would be virtually impossible for any employer to be able to read across from the amount being paid to the particular circumstances of the employee. The capacity, so to speak, to de-construct that would be most difficult.

The issue of the additional costs to business was raised. The noble Lord, Lord Goodhart, pressed me about the real cost involved and as, to whether it was £37 multiplied by 10. No, the compliance costs are borne not only by employers in the case of WFTC but also by those who do not contribute. As the noble Lord recognised, the £37 is a weighted average across those small employers of different types which have one or more WFTC employees and those which in a particular year may have none, although they may have during the following year. I give way to the noble Lord.

Lord Goodhart

My Lords, I am grateful to the Minister for giving way. Can she explain to us how it is that the compliance costs are borne by those firms which do not in any year pay anyone through WFTC? I simply do not see how that can be possible. It seems to me that it is all set out in paragraph 56 of the draft impact assessment. I believe that we need to take a closer look at what that really means.

Baroness Hollis of Heigham

Yes, my Lords. However, the point is that the employers who do not have a WFTC employee will, none the less, have to educate themselves on WFTC and ensure that their payroll systems are capable of paying tax credit if required. As the noble Lord said, that detail is indeed set out in the regulatory impact assessment—

Lord Goodhart

My Lords, I am sorry to interrupt the Minister again, but does that not refer to the implementation cost and not to the recurrent cost?

Baroness Hollis of Heigham

My Lords, we are talking about two sets of figures. We estimate that the non-recurrent cost/the implementation cost will be about £40 million, and that the recurrent compliance costs will be around £100 million. We expect that to be the annual cost.

Other noble Lords pressed for the exemption of small businesses. I believe that my noble friend Lady Turner dealt with that aspect very effectively. Perhaps we should consider just what that might mean. If we were to allow an opt-out for small employers having, say, up to four, five or 10 employees, that would mean that WFTC would not operate in virtually the whole of the rural countryside because most rural businesses are small ones. It would also mean that there would be an incentive for larger companies to disaggregate.

We have already been told by one major high-street distributor and retailer that if smaller firms with fewer than 10 employees were allowed to opt-out, it would break all its shops down into separate units in order to come below the employee threshold. Therefore, to avoid a proper employer's responsibility, we would then get the thin end of the wedge for disabled people. We have similar arguments about the 20 or the 15 employees as regards disabled people. It would mean that, each time, small employers would demand special exemption from student loans, the minimum wage, the Disability Discrimination Act or WFTC. Every larger company in the country that could would disaggregate down to slough off responsibilities that are part and parcel of being a good employer. I do not believe that that is a path which we should encourage; indeed, it is not a path that the Government propose to follow.

There are other practical problems about the flow of numbers. For example, does it mean that one extra employee who takes a firm over that ceiling might then bring everyone or just himself into the WFTC code? The problem of fluctuating numbers which we dealt with when we discussed the Disability Discrimination Act remains a real one. It would be quite hard for the Inland Revenue to keep constant tags on the make-up of all full-time and part-time employees within a company in this regard, and whether there was a sufficient density of people, if you like, in regard to a WFTC claim.

We believe it is right and proper that WFTC, like the minimum wage, is a proper responsibility of the employer. However, it is important that we ensure that small businesses can cope with those responsibilities. Therefore there is the small business service, the helpline, and the help with payroll systems that we shall offer. Our approach is to help small businesses overcome any difficulties they may face in implementing the measure rather than to allow them to dodge those responsibilities altogether.

The noble Lord, Lord Skelmersdale, asked about PAYE coding. That is an obvious and deceptively attractive point. However, after discussions with the relevant employers' bodies it was agreed that this would not deliver the necessary accuracy and reliability and that it was better to include it as an itemised entry on a wage slip. There have been questions about employers' cash flow problems. I am mindful of the time. As that involves a technical point with regard to the payment of NICs and PAYE I shall write to the noble Baroness about that, if she will allow me. I shall also write with regard to the problems of the self-employed. Finally, I turn to some implications for government.

Lord Higgins

My Lords, I am most grateful to the noble Baroness for giving way, but this is a little more than a technical point. As I understand it, companies will be out of pocket for a considerable period of time. They will bear a substantial cost in terms of cash flow. I think this is a little more than a technical point.

Baroness Hollis of Heigham

My Lords, I am happy to take up the time of the House to explain the matter, if your Lordships wish. Employers will be able to set tax credit payments against their PAYE tax and NICs liability. If they do not have enough PAYE tax and NICs to fund tax credits they can apply in advance for funding from the Revenue. Many small employers will gain a cash flow advantage from the measure in this year's Budget which increases the number of employers who can settle their tax and NICs liability to the Revenue quarterly rather than monthly. As I say, I am happy to continue this discussion through correspondence.

I was asked about the American and the Canadian experiences. I think it is inappropriate to bring those experiences to bear. The American earned income tax credit is paid not as you go, but yearly and retrospectively—so it cannot operate as a work incentive—and most money is paid to higher earners. Therefore those on lower earnings receive least and those on higher earnings receive most. As I said, it is paid yearly and retrospectively. It tends to be a lump sum that is most often used to pay for a holiday or for white goods. As I say, it is paid with increasing generosity the more you earn. There is absolutely no comparison, except as regards the words "tax" and "credit", between what the American system does and what our system proposes. As for the Canadian system which was also described, it was not integrated into the tax system. It was not paid through the pay packet but into bank accounts rather like family credit. It has been scrapped and replaced by a child based universal benefit which is akin, of course, to our own child benefit. Again there is nothing for us to learn in this regard from either the American or the Canadian experiences.

Finally, I was asked about accountancy. There are absolutely no tricks or anything underhand about this; it is all entirely transparent. I confirm that the national accounts will show the tax credits as government expenditure, as required by the new European accounting convention which was introduced from 1998. They will be treated in the same way as MIRAS, no more and no less. The Government's presentation, where different, will be capable of being tracked in so far as the convention changes the conversion of the national accounts basis. Again I am happy to explain this point further if your Lordships wish. The tax credits will be treated as government expenditure in the same way as MIRAS. The change over from 1998–99 will be perfectly clear and one will be able to track that in a transparent way in government accounts. We are, of course, in that respect conforming to international accountancy standards.

As I say, this has been an interesting debate. Your Lordships must forgive me if I have not answered all the points that have been raised. We know that there is a problem with regard to the interface between tax, benefits and wages. We know that what deters people from entering work are the relatively low wages paid when they first start work; the insecurity of those wages compared with the security of benefits; and especially if they are lone parents, the cost of providing alternative quality care for children. One way forward for any government is to reduce the value of benefits, another is to make more shallow the benefit tapers, but that extends dependency. Or you can increase universal benefits, but that is expensive. Instead what the Government are doing—which I believe is right—is to protect benefit levels for those who are unable to work. We are strengthening those benefits that can be carried into work, such as child benefit and child maintenance. Through a combination of the minimum wage, reduced income tax, reduced National Insurance and WFTC we shall make sure that work pays.

Since the 1998 Budget, 1.8 million people have seen their income tax bills halved and a further 900,000 people have been removed from tax altogether by national insurance changes. WFTC will help two groups in particular: lone parents, and married couples with children where only one partner is in work. WFTC will encourage lone parents to come off income support and move up the income ladder into work while it will keep married couples already in low paid work from descending into benefit systems when their jobs become more precarious or their hours or wages are cut. In other words, it is a help to lone parents and it is a hand to stop couples descending. We believe that WFTC will support families and will address their poverty. As my noble friends Lady Turner and Lady Lockwood emphasised, it will particularly address the problem of child poverty. WFTC will lift 700,000 children out of poverty. That will be no small achievement. I hope that your Lordships will give this Bill a Second Reading.

On Question, Bill read a second time, and committed to a Committee of the Whole House.