Tax Credits Bill

HL Deb 26 April 1999 vol 600 cc11-29

3.8 p.m.

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

My Lords, I beg to move that the House do now resolve itself into Committee on this Bill.

Moved, That the House do now resolve itself into Committee. —(Baroness Hollis of Heigham.)

On Question, Motion agreed to.

House in Committee accordingly.

[The PRINCIPAL DEPUTY CHAIRMAN OF COMMITTEES (Lord Tordoff) in the Chair.]

Clause 1 [Certain benefits to be known as tax credits.]:

Lord Higgins moved Amendment No.1:

Page I. line 7. leave out first ("tax")

The noble Lord said: In moving Amendment No.1 I believe that it would be for the convenience of the Committee if I were to speak also to Amendments Nos.2, 3, 7 and 8, including discussion on Schedule 1 stand part. If ever there was a pure Alice in Wonderland piece of legislation, then it is Clause 1 of this Bill, which we seek to amend. Your Lordships will recall that in Lewis Carroll's book Alice's Adventures in Wonderland there is a semantic exchange between Alice and the other members of the tea party. The following quotation illustrates the point I wish to make about this clause. The March Hare asked, 'Do you mean that you think you can find out the answer to it?' said the March Hare. 'Exactly so, ' said Alice. 'Then you should say what you mean, ' the March Hare went on. 'I do, ' Alice hastily replied; 'at least—at least I mean what I say—that's the same thing, you know.'

The heading of Clause 1—the clause which we seek to amend— reads: Certain benefits to be known as tax credits".

The clause seeks to change the meaning of words which are extremely clear. This is not a tax credit Bill and we are not dealing with the concept of a tax credit. If one needs further support for such an argument, one has only to read the official publication of the Office for National Statistics entitled, The UK National Accounts Concepts, Sources and Methods which makes it absolutely clear that, If a refund or allowance can be calculated independently of a procedure for calculating the tax payable and uses different criteria and does not depend on the actual amount of tax to be paid or the marginal rate of tax it is not integral to the tax assessment".

In other words, if it is not integral to the tax system, it is not, and should not be construed as, a tax credit.

That brings us to the matter of why the Government should be engaged in this extraordinary semantic operation. Before the general election the Prime Minister made it absolutely clear that it was the Government's intention to cut the social security bill and to spend the money saved on education and health. They have failed to do that. The Bill now before us increases the already large bill for family credit by about £1.5 billion. By calling that increase and the change in the structure a tax credit, the Government seek to suggest that this is a tax reduction rather than an increase in public expenditure. No doubt we shall return to these points later.

The Department of Social Security is increasingly being taken over by the Treasury. The Contributions Agency has already been moved from the DSS to the Treasury. The whole trend is in that direction. Changes will be implemented but, as the Child Poverty Action Group has pointed out, what is really involved is a means tested wage subsidy. Rather than the Inland Revenue fulfilling its traditional role of collecting money, it will find itself in the unusual role of giving people money. However, it will not give them money as part of the tax system. This provision will not constitute a tax credit; it will be a straight hand-out, whatever the wording of the clause. Amendment No.1 and the amendments grouped with it seek to call the provision what it really is. I am glad that we have deferred the question of the title of the Bill. No doubt at a later stage we shall alter that too.

I wish to make a number of substantive points. An extra £1.5 billion is to be given to a particular group of people. It is therefore not surprising that many of those who represent that group—many of whom carry out extremely valuable work—do not object to the increase in expenditure which will take place. However, nearly all of them have serious doubts about the way in which the system will operate. If it were to operate as a tax credit system, we on this side of the Committee might well be in favour of it. However, the method of its implementation is not only alien to the ethos of the Inland Revenue; it also puts a serious burden on business. It has serious administrative costs and it increases rather than reduces dependency on the welfare system. It creates more problems with regard to fraud and is likely to increase the stigma of drawing benefits. Above all, it is an extremely complex arrangement. Why, therefore, have the Government decided to go ahead with what is not a tax credit scheme but something different?

I refer to the examination of Mr. Martin Taylor of some of these issues on behalf of the Government. That suggests that the Government wished to make it a genuine tax credit system. However, as we all know, they have decided that that is not possible. This, again, is something we shall need to probe. The CBI has made a number of points as regards the feasibility of the system. It has said that the Inland Revenue discovered a number of intractable problems with regard to making this a genuine tax credit system. I refer, for example, to dealing with changes in the level of the award. As I understand the matter, the award will be stable for a period of 26 weeks. There will be different tax rate bands, particularly when the lop band is introduced. There is no mention of the fact that the 20p rate is to be removed. It is said that it is difficult to adjust codes after a period of unemployment. Finally, there is reference to the unstable wages of many of the employees who will receive the credit. If the system can cope—at any rate on a six-monthly if not on an annual basis—with changes of that kind, it surely should be able to cope with changes which take place only every six months or so. These again are matters we shall need to probe. Those are the reasons given for not having a real tax credit system and for deciding to keep the curious change of name in the clause which we seek to amend.

The Chartered Institute of Taxation has stated that there is to be no direct link between the PAYE tax period or the pay on which it is based and the amount of credit paid out to the employee. One is bound to ask why, as the only difference being introduced concerns the method of payment and the Government are arguing that the problems involved in introducing a real tax credit system are insuperable, they did not abandon the measure? The answer lies with the public relations connected with a working families' tax credit. This was announced by the Chancellor of the Exchequer, Mr. Gordon Brown, as very much the flagship of the welfare reform programme which the Government are introducing and as an important component of the so-called "welfare to work" programme.

In that context it is not irrelevant to consider what the Bank of England has stated. It says that the impact of this change on the labour market—that is, the increase in numbers employed—will be "very small". If the Bank of England takes that view of this flagship measure in encouraging people into work, it will 'be interesting to find out in the course of our proceedings exactly why the Government are going ahead in this way despite all the disadvantages I have mentioned. It might well have been more sensible to abandon the idea and not face this curious matter of the title of the Bill and the purpose of this clause.

The Government argue that it is important to call the measure a tax credit as it will then appear on pay slips and without that knowledge people who are seeking employment will not realise they receive extra money for taking up a job. I find that a remarkably paternalistic approach to the problem. If the only advantage is that it is paid through the wage packet, there are, as we know. an increasing number of exceptions—for example the self-employed—who are not paid through the wage: packet. While that is a semantic point in terms of presentation, it is certainly not unimportant. One is well aware from the massive number of representations received on the disadvantages of the proposal that bodies as widely disparate as the CBI and the Institute of Directors on the one hand, the TUC on the other, and a large number of groups in between ranging from the Child Poverty Action Group and the Low Pay Unit to the Federation of Small Businesses, believe that the change is a bad change and that serious problems could have been avoided either by pursuing the case for a real tax credit scheme or, alternatively, paying through the existing arrangements.

Finally, we are told that insuperable difficulties are involved in making it a real tax credit, which would make the clause unnecessary. At the same time we are told at paragraph 5.13 of the Budget report, an extremely glossy document, that, The Government sees a case for improving the transparency …It is examining, for the longer term, the case for integrating the new Children's Tax Credit with the child premia in Income Support and the Working Families Tax Credit", and so on. If that is the long term aim, why are we told that it cannot be done at the present time? Acting as the Government propose will have disadvantages. The only advantage—a doubtful advantage, in my view—is that it will be paid through the pay packet.

We shall return to all these points. The Bill starts off on the wrong foot. The first clause seeks to represent what the Government are doing as something which, quite clearly, they are not doing. For that reason I have much pleasure in proposing Amendment. No.1 and the related amendments. I beg to move.

Lord Goodhart

We on these Benches have not tabled an amendment to the same effect as that of the noble Lord, Lord Higgins. That is because, on the whole, we feel that if the Government wish to give a benefit an inaccurate name that is their affair and we are not in the business of correcting them. Nevertheless, having said that, I believe that the noble Lord, Lord Higgins, is absolutely right to say that this is not a tax credit but a benefit. We take up the matter in a number of places, starting with our intention to challenge the Question that Clause 2 stand part of the Bill.

What is the difference between a tax credit and a benefit? The purpose of a tax is to raise money to meet government expenditure. Income tax starts with the taxpayer's gross income. But it is recognised that simply basing the tax on the gross income could be unfair to those with lower incomes, so one cuts their tax liabilities by treating their taxable income as less than their actual income. This applies not only to those on low incomes but throughout the income scale. It is done by means of reliefs and allowances against tax—the personal allowance, the first £5,000 or so of income, the married couple's allowance, now rightly about to be abolished, and relief on pension contributions. A similar result could be achieved by a genuine tax credit. One calculates the tax liability on someone's full income but one then says "You do not have to pay the first x pounds"—whatever the figure may be—"of your nominal liability. " One can go beyond that to negative income tax by saying that if a taxpayer's liability is less than the notional figure of x pounds the Inland Revenue will pay the difference to the taxpayer.

By contrast, the purpose of a benefit is to provide financial assistance out of public funds. In the case of means-tested benefits, the amount of those benefits is based not on the needs of an individual but of a household. For years people have been saying, "Let us have a single integrated tax and benefits system based on the idea of negative income tax. " That is the philosopher's stone. Like the stone, it never actually works. From a distance it looks like a marvellous idea, but the more one looks at the details the more one sees the obstacles. That is my experience. It is an issue on which I have changed my mind over the years. That also seems to have been the experience of the committee set up by the Labour Party before the last election, chaired by the noble Lord, Lord Borne, to study the reform of the welfare system.

The same thing has happened with the working families' tax credit. The Government originally considered trying to deal with the working families' tax credit through the PAYE coding system. They found that it could not be done. The main reason for not being able to integrate tax and benefits is that tax is based on the income of the individual and benefits are based on the needs of the household. It might have been different in the days when the income of husband and wife were aggregated for tax purposes and when couples rarely lived together without being married. Nowadays, that is simply impossible. One needs to know who is in the household for the purposes of calculating the working families' tax credit, as indeed one does for any other type of benefit. Is it a single parent family or is it a couple? If it is a couple and both are earning, then the income of both has to be taken into account for the working families' tax credit but not for tax. Taking it into account for the purposes of income tax liabilities would be inconsistent with the principle of separate taxation of husband and wife, which is now well established and politically irreversible. In the case of a couple where only one of them is earning, one still needs to know that they are a couple because one cannot claim child care credit if one has a non-working partner.

There are other aspects of the working families' tax credit which cannot be reconciled with the principle of a tax credit, as properly so called. For example, a claimant with a certain amount of capital is disqualified from receiving the working families' tax credit even if such capital produces no income. Assets not producing income would be irrelevant for the purposes of income tax. The working families' tax credit does not reduce the tax liability of employed claimants in the way a genuine tax credit would. Employees are still liable for tax through PAYE and national insurance contributions just as before. The employee or his partner receives benefit just as before. The only difference is that the employer, who until now has been the collecting agent for the Inland Revenue through PAYE, will now become the paying agent for benefits. In the case of the self-employed, where there is no employer, the payments will continue to be made as they are now, tax being taken with one hand and working families' tax credit being handed back with the other. As the noble Lord, Lord Higgins, with his long and detailed experience of public finance, pointed out, working families' tax credit is, for accounting purposes, a benefit and not a credit. The Government, as I understand their position, have accepted that European accounting principles require them to show the working families' tax credit as public expenditure. What we have here is window dressing. The noble Lord, Lord Higgins, was telling no more than the truth.

3.30 p.m.

Lord Skelmersdale

My Lords, the noble Lord, Lord Goodhart, revealed all sorts of things. I blush to say this because my noble friend Lord Lawson was a former boss of mine. The noble Lord explained, as did my noble friend Lord Higgins, the reasons that this is not a tax credit. However, he started from the most extraordinary position. As the spokesman for an opposition party, he said in effect, "We are not in the position of correcting the Government". What on earth are oppositions for?

To me, a tax is either a levy on income or a charge on potential income. In this case, there is absolutely no relationship between the tax system and the credit. Of course it is a credit, and later amendments deal with how we as parliamentarians can identify that credit in various government accounts, such as the Red Book. One thing is absolutely certain. By no stretch of the imagination is this a tax credit. The arrangement that the Government are putting in place will, where tax is due, tax the individual, then give a lump sum. It bears no relationship to the tax that the individual has paid. It simply bears a relationship to the original wages. I cannot see that as logical.

Baroness Carnegy of Lour

The amendments seem to go far beyond the terminology that the Government used when they describe publicly funded earnings supplements as tax credits. I cannot agree with the noble Lord, Lord Goodhart, any more than can my noble friend Lord Skelmersdale, that this is not our business. It seems very much Parliament's business.

We are discussing another example of the Government's growing habit of saying one thing and doing another. At the outset of the Government's term of office that habit was more or less accepted by the public as intelligent public relations and the spin that goes with modern politics. But developing now is something that is not public relations. It is not all that far from public deception—letting people think that one thing is happening while something different and perhaps less popular is being done. That will have a serious effect as time goes on, because it will lead to greater cynicism than that which the public feels already about politics and politicians. That should concern us all because it is dangerous for democracy. The amendment poi nts up that danger.

The Government want, rightly, to reduce the evil of the poverty trap and for people to experience that families with children and disabled people, if they work, can be better off, not worse off. That is a wholly laudable objective. It is clear that the Government would like to achieve that through the tax system but they failed to find a way for a number of reasons—some of which we know, although perhaps we do not know all of them. Instead of the Government doing as they said, they are pretending by continuing with enhanced benefits—which is a good thing—but paying them via the Inland Revenue and calling them tax credits.

Likewise, there is no honest admission of increased spending on social security in the Chancellor's account to the nation. That would have been tactless. He had promised to reduce it. Instead, the increase appears as part of the tax system in one place and as an increase in Government expenditure in another.

The Government's reason for those discrepancies and misdescriptions were helpfully explained by the Minister on Second Reading and on pages 2 and 3 of her subsequent detailed letter. Those reasons are doubtless the case. People who receive the credit in their wage packet will, whether or not they pay tax, tend to see it as part of their take-home pay. That is a wholly good objective, but should it be called a tax credit when it is not? I think not and for the sake of the nation, I suggest that the Minister should think not. The amendments would render the Bill a lot more honest and I support them.

Baroness Turner of Camden

I simply cannot accept the amendments. I do not support them at all. I support the Bill, which is founded on the assumption that something must be done about poverty—particularly family poverty. That is the Bill's objective, and for that reason a number of organisations to which the noble Lord, Lord Higgins, referred—such as Child Poverty Action Group—have supported the Bill as it stands. It would not be a good idea to remove the word "tax" from the Bill. The idea that people will receive the extra amount through their wage packets, via the Inland Revenue, is a good one. It is entirely appropriate that the Bill should be worded in the way that it is. I urge the Committee not to support the amendments.

Baroness Hollis of Heigham

When the noble Lord, Lord. Higgins, began I was not sure whether we were going to hear a speech on semantics or a Second Reading speech. I believe that his speech moved between the two. The amendments seek to change the title of "tax credit" and to remove Schedule 1. The noble Lord said that the Bill starts off on the wrong foot. On the contrary. The change in title states exactly what the Bill seeks to do. The noble Baroness, Lady Carnegy of Lour. made the point for me very well, and that was reinforced by my noble friend Lady Turner of Camden.

The Bill will give, via the Inland Revenue and the pay packet, support for low wages or low hours to those in work and will therefore make more attractive entering into work and staying in work. It allows people to overcome the unemployment trap of moving off benefit and into work—and, within work, it will allow people to keep more of every pound that they earn. As the credit will be run by the Inland Revenue and paid through the pay packet, it is proper, appropriate arid transparent to call it a tax credit. The change to WFIC and DPTC asserts their new character and puts them in the context of work and as a reward for work.

Baroness Carnegy of Lour

The noble Baroness felt that I was in agreement with her; indeed I was on one aspect of what the government are trying do. She said that it is appropriate to call this a tax credit. Does she really believe it appropriate for the Government of this country deliberately to call this provision something which it is not? It is not a credit against tax. Pay, tax and net pay are shown on the payslip; then this benefit is added. It is simply recorded on the same piece of paper. Why does the Minister feel that it is legitimate to call it a tax credit?

Baroness Hollis

I hoped that I had made the point that it is being run by the Inland Revenue and will come through the pay packet. Therefore it is not a benefit being run by DSS and paid to the person at home as income support. There is all the difference in the world between benefits such as income support and JSA, which are paid by the DSS to someone who is out of work and at home, and a benefit which then becomes a tax credit, run by the Inland Revenue and paid through the pay packet, making the perception of the value of work, particularly entry wages, that much more obvious to people. In other words, to address the first point made by the noble Lord, Lord Higgins, this is not merely a re-badging exercise.

Lord Swinfen

The noble Baroness says that this is not a benefit, but a tax credit. It is a benefit to the person who receives it. It is not strictly a tax credit; it is a benefit. It has to be shown under EU rules and regulations as government expenditure. What will it be shown as? Surely it is a social security benefit.

Baroness Hollis of Heigham

Of course this is a benefit to people in the same way as wonderful music is a benefit to people. But if the noble Lord means by "benefit"that it is a social security benefit, no, it is not. It is an Inland Revenue tax credit being paid through the wage packet.

Lord Peston

Perhaps I may interrupt my noble friend so that she can help to clarify this point to all of us. Am I right in assuming that the putative take-home pay form will include a calculation stating the tax that a person would have paid without the credit, that a figure is deducted, and the result is the net income? It clearly leaves a person with a different net income, and the reason is clearly stated. It is not added as benefit. Is that correct? It is a tax credit, in precisely the form stated by my noble friend.

Baroness Carnegy of Lour

Will the Minister explain that point carefully? My understanding was different from that of the noble Lord, Lord Peston. I thought that a person's gross pay would be on the payslip, as would his or her tax contribution and net pay, and below that would be this benefit. Is that correct?

Baroness Hollis of Heigham

As at present, gross and net pay will appear on the payslip, as will deductions for national insurance, pensions and so on, together with the addition of the tax credit. So the payslip will include the deductions and the addition, and the pay going to the individual will be the sum total. But because that transaction cannot be done through PAYE, it will appear as a separate entry on the payslip. I hope that the point is now clear.

I return to the point made by the noble Lord, Lord Higgins. Basically, the noble Lord suggested that this is a re-badging exercise without substance. I want to challenge him on that point. This provision begins the process of bringing together some of the taxes and benefits in our system to ensure that work pays. It will reduce the marginal tax rates for over 70 per cent of families concerned—that is, 500,000. Two-thirds of people will, for the first time, see their marginal tax rates fall below 70 per cent. This measure reduces the absurdity that presently exists; namely, that 45 per cent. of families presently have to be in receipt of family credit to receive income support; and we then proceed to tax part of the value of that amount away; whereas in future 97 per cent of people on working families tax credit will not be liable to income tax.

As the noble Baroness, Lady Carnegy, and my noble friend Lady Turner said, this provision reduces—

Lord Goodhart

Will the Minister explain how it is that 97 per cent will not be liable to income tax when there will be a perfectly clear figure on their payslips for the PAYE deduction?

3.45 p.m.

Baroness Hollis of Heigham

The increased generosity of WFTC and DPTC means that 97 per cent. of claimants will not now pay income tax as a result of this measure. If I have any additional information I will provide it for the noble Lord, but that is my understanding. At present, 45 per cent. of those on family credit have part of the value of that credit taxed away. That will not be the case in future.

The change of title is not re-badging. It indicates that we are approaching the issue of making work pay and that once people are in work they will be able to keep more of their pay through a different system and a different approach. We are no longer talking about income support, but about support for low-paid work and low wages and families and lone parents in those work situations.

It seems that behind these amendments is the suggestion by noble Lords opposite that tax credit should not be introduced but should remain as benefits. In other words, their intention is to undermine the aim of producing a clear link with work, so that those who move into relatively low-paid jobs with relatively low entry wages will nonetheless see a clear advantage from moving into work. The amendments would achieve nothing, certainly not in terms of the many people on low to middle income who will benefit from tax credits. We are determined to provide them with essential support by making sure that work pays.

The other amendment linked with these proposals proposes that Schedule 1 should not be included in the Bill. It may be helpful if I explain the purpose of Schedule 1. This schedule has its references in primary legislation where the replacement of family credit by WFTC and disability working allowance with DPTC will take place. The tax credits build on the existing benefits. The most efficient way of doing that in legislation is to build on the current social security provisions for these benefits. Contrary to the noble Lord's assertion, this was indeed how Martin Taylor recommended that the Government should proceed. Clause 1 of the Bill effectively converts the benefits into tax credits. Schedule 1 provides guidance for the reader of the legislation. It is not strictly necessary but it will make the matter much clearer to those concerned.

The first point raised was that this was merely a re-badging exercise. I have tried to show that, on the contrary, not only in a mechanical sense is it being run by the Inland Revenue and paid through the pay packet, but, more substantially, it will help to overcome the unemployment and poverty traps which have hung like albatrosses round the necks of those who struggle to survive on low wages.

The second point raised by the noble Lord, Lord Goodhart, related to public accountancy and public expenditure. The noble Lord argued that because the amount is quoted as public expenditure from the point of view of European conventions, that indicates that it remains a benefit rather than a tax credit.

We discussed this point to some extent at Second Reading. I remind the noble Lord that we are treating this matter, in terms of accountancy. presentation and the Red Book, and European standard terms, in exactly the same way as MIRAS. I do not think that many noble Lords would regard MIRAS as a social benefit; they would regard it as effectively tax credit support for housing costs. These benefits will be treated in exactly the same way.

Thirdly, noble Lords opposite seemed to imply that if, however, the tax credit had been paid not as an additional entry on the payslip but through PAYE itself, that would have reinforced the argument that it was indeed a tax credit, and some of the opposition to the proposal might have been withdrawn, as the position would have been more obvious. That may be so. It is an honourable question to ask. It is one that puzzled me when I first came to this matter. The point was discussed at considerable length in consultation with employers. If it could have been done, it would have been a more attractive approach—not in terms of meaning and whether or not it is a tax credit, but in terms of presentation to the people concerned. It would have been more obviously attractive.

The simple answer is that tax credits are not being handled this way because PAYE coding cannot deliver everything that we currently want to achieve with WFTC and DPTC. The Treasury and the Inland Revenue understood this from the outset. It may be helpful if I share their reasoning with the Committee.

Noble Lords will appreciate that, building as it does on family credit, as Martin Taylor recommended, the tax credits will be set in advance, using a snapshot of family circumstances at, and just prior to, the date of claim. That helps set tax credits for the next 26 weeks. In order to deliver the same certainty of income that was so valued in family credit, the tax credit awards will be for a fixed amount for a set period running from the date of claim.

But PAYE operates through the tax year constantly to adjust to changing circumstances, so that at the end of the tax year (by 5th April) the right amount of tax has been paid. The technical term is "cumulation". It works in the following way. The system looks in each pay period at how much has been earned from the beginning of the tax year; it allocates the correct fraction of the taxpayer's allowances for the entire year; it calculates the net taxable income from the beginning of the tax year and calculates the tax that should be paid on that. The payroll system then compares what ought to have been deducted from that income by the end of the pay period in question with how much has been deducted, and deducts or repays the difference.

It is also obviously the case that such a system is clearly unworkable for the lower paid who are entitled to working families' tax credit but do not pay tax because they are below the lower earnings limit but are, with 16 hours of minimum wage per week, entitled to claim working families' tax credit. We could not pay them a tax credit through PAYE if there were no PAYE system for that employee.

1 suppose that, alternatively, the amendment proposes that 80,000 employers who are currently exempt because they employ someone for fewer than 16 hours a week in their household, perhaps as a cleaner or a gardener, who works for several employers and therefore works for more than 16 hours a week and is entitled to WFTC as a result, would come within the system, which they currently do not.

There is thus a real problem in applying this system either to employers who individually employ someone for fewer than 16 hours a week or to people who currently do not pay tax because they are below the lower earnings limit.

Lord Higgins

Is it not the case that the very lowest paid do not gain at all under these proposals?

Baroness Hollis of Heigham

I am sorry, I do not understand what the noble Lord means. A person who works 16 hours a week and is paid whatever sum—but obviously, with the minimum wage, at least £3.60 an hour—-will be entitled, if the family is a couple with children or qualifies for DPTC, to access to the working families' tax credit. In certain circumstances, some of which I have described, that person may not be paying tax, which is the reason for saying that the payment could not be handled through the PAYE system but has to be included as a separate item on the pay-slip. I hope that that is clear to the noble Lord.

The Inland Revenue is confident that it could design a new enhancement to the PAYE system which could cope with providing regular support and even paying money out as long as pay remains stable. When pay changes, so does the amount of tax withheld. If pay fluctuates greatly, then the PAYE system reacts In response and will not deliver the even flow of reliable money that the policy envisages. It will sometimes deliver too much, sometimes too little. The over-payment or under-payment in each pay period could be quite marked, sometimes even taking back tax credits that had already been given.

The inconsistencies are particularly marked where taxpayers are not firmly in one rate band, where there are gaps in entitlement or where the level of the award changes during the tax year because the awards last for only six months. We know that there is considerable change in circumstances between each six months' award of family credit. Family credit seldom remains constant between one award period and another.

In the end, it was generally concluded in discussion with employers, firms, businesses and the federations that the PAYE system could not deliver these tax credits. That was the conclusion not just of the Inland Revenue but also of the consultative group, including business and payroll specialists, which looked at the issue in detail.

I have gone into the matter in detail because I know from previous meetings that Members of the Committee are concerned about the issue. I therefore thought it might be useful to put the detail on the record.

Lord Goodhart

I am most grateful to the noble Baroness for giving way. Is it not a fact that the noble Baroness has just explained very clearly why both the aims and the mechanisms of the working families' tax credit are so different from the system of taxation that the working families' tax credit cannot be treated as a tax credit at all? That is the whole point.

Lord Skelmersdale

Before the noble Baroness answers, perhaps I may add a point. If there were a genuine tax credit system, surely all that would be necessary would he to have a minus amount of PAYE before one started?

Baroness Hollis of Heigham

If we follow the argument of the noble Lord, Lord Goodhart, I think he is taking us down to a basic citizen's income, in which we pay either pluses or minuses. We know that a basic citizen's income requires a tax rate of something like 50 per cent and even then does not satisfactorily cover housing costs. It may be that his party no longer espouses that system. That would be the only way that the system he proposes could deliver what he is suggesting.

I have tried to address what I believe to be the three arguments brought to the Committee this afternoon from the Opposition benches. It was suggested that this was merely a re-badging exercise. I have tried to argue that, far from being a re-badging exercise, it represents a new but profoundly held commitment by this Government. Under the previous government giro cheques for income support, and so on, were handed out and people were told, "Go away and come back in 16 years' time". The whole thrust of the Government's policy, in terms of the New Deal, the single gateway for work and the pilot schemes for young people, disabled people, lone parents and older people is that the best pathway out of poverty and out of bumping along at the bottom of society is to have access to work.

We know that one of the reasons why people are sometimes reluctant to seek work, over and beyond issues of childcare and skills and training, is the relatively low entry wages compared to the level of benefit they may currently enjoy by virtue of the number of children they have, their disability or their housing support. We are seeking to overcome the perception in people's minds that the best way of helping them is simply to give them more income support. Instead, we are trying to make obvious, transparent and attractive the move from being on benefit to being in work. In so doing, the in-work support which we currently give them will be reshaped and refocused to become a tax credit, such that it pays to work and that it pays when in work to work more, to gain more and to keep more. This is not a re-badging exercise; it is the basis of the entire philosophy of this Government. Shame on the previous administration for leaving so many people for so long in the twilight unnecessarily. I hope that the noble Lord will withdraw his amendment.

Baroness Carnegy of Lour

Before the noble Baroness sits down, she has not addressed the precise point of the amendment, which is that the Government are calling something a tax credit when it has nothing to do with tax. It is a misnomer, and a misleading one. It may well be that, now he realises that, which I do not believe he did before—and I can understand that—the noble Lord, Lord Peston, will think of a way round this problem to help the Government. Will the noble Baroness reconsider the name of this credit? It is not a good thing for the Government to mislead people. They should not call something by a name which does not apply.

Lord Peston

Before my noble friend replies, and before the noble Lord, Lord Higgins, tells us what he intends to do about the amendment, perhaps I may put on my old-fogey hat and say that I wrote an article 35 years ago in which I said that the distinction between public expenditure and taxation was entirely arbitrary and that any clever person could dress something up one way or the other. I do not believe that the noble Lord, Lord Higgins, is saying anything different. He does not seem to be claiming that anything substantial follows from his amendment; he just prefers one set of words to another.

My noble friend is saying—and this is the substantial issue—that someone who goes to work will now end up in a better net position as a result of going to work than would otherwise be the case. That is the substantial issue; it is what the policy is about. It seems to me that that net improvement could quite reasonably be called a tax credit. I do not believe that the words matter. What matters is what my noble friend the Minister is saying, which is that it is hoped that there will be a substantive improvement in policy that will make people both more employable and more willing to work. That is, I assume, what most Members of the Committee want. I did not understand the noble Lord, Lord Higgins, to be saying that his amendment was about anything other than words. I am never one to denigrate the use of words, but it is not what the policy is about, as my noble friend pointed out.

Lord Skelmersdale

What I want, and what I believe everyone wants, is a credit for working paid through the wage packet. I have no argument with the Minister on that. The only question I would ask her is the following: if the Government had chosen to use a different agency to pay this credit, would it still be known as a tax credit? That is the issue.

Baroness Hollis of Heigham

If it is to be paid through the wage packet by whom is it to be paid except by the Inland Revenue?

Lord Skelmersdale

The Government can give instructions to the Department of Social Security or any other agency to make the payment through the wage packet. As under the Bill, the Government can give instructions for employers to pay it through the wage packet. It does not have to be done by the Inland Revenue. I accept that the Government have chosen this route for very good reasons. Nonetheless, if they had chosen some other route there would have been no possible justification for calling it a tax credit.

Baroness Hollis of Heigham

The noble Lord advances an extremely interesting proposition. Are the Opposition Benches now entirely happy that this should be paid through the wage packet and that it should be a subsidy, as it were, for people who are marginal to the labour market and therefore need this support in order to move from benefit into work? It is not proposed in most of the remaining amendments that payment should be made through the pay packet. However, I am sure that we shall argue that point when we reach it.

Lord Skelmersdale

Before the Minister goes too far, I should remind her that I have very limited or no connection with my own Front Bench. Therefore, she cannot possibly cast as Conservative policy anything that I say.

Baroness Hollis of Heigham

One was aware of divisions of opinion within the Opposition Front Benches at the other end of the corridor. I had not realised that such divisions extended to the first and second Benches on the other side of the Chamber. But if that provides for a variety of views and not simply a monolithic recitation of briefs provided by the CBI or anyone else in the course of our debates, I am sure that we shall all be the wiser—if not wiser, certainly enriched—by the division of views. However, the noble Lord, Lord Higgins, may like to have words with his colleague afterwards. As I understand it, the proposition of the noble Lord is that this money should be paid through the DSS. Therefore, in future employers will work with the Inland Revenue in regard to their tax and national insurance contributions but 'when it comes to this other item the DSS must know about their pay roll, the amount of pay and the number of employees. The DSS would have to check for fraud and possible collusion, carry out the inspection and handle that information.

Does the noble Lord seriously suggest that employers would welcome the DSS bringing to bear all its traditional forces of investigation so that the same small businessman would have to give information to the Inland Revenue for one reason and similar information to the DSS? Does he suggest that there should be two sets of bodies to supervise what goes on, two sets of investigations, two lots of inspection and two lots of penalties?

Lord Skelmersdale

I thought that we started with family credit.

Lord Higgins

A number of unexpected developments have occurred during this debate, starting with the announcement of the noble Lord, Lord Goodhart, that it was not the function of his party to correct the Government. I am sure that that view will not prevail for long I find myself very much in agreement with everything he said, as I did with very nearly everything he said at Second Reading. I look forward to his support in the course of subsequent debates.

I pick up first the point made by my noble friend Lady Carnegy. It is crucial that the scheme should be honest. The description in the Bill and its title are not honest. They are misleading. I gave the reasons earlier, in particular the presentation of something as a tax cut when it is in reality an increase in public expenditure. As the noble Lord, Lord Peston, pointed out, it is possible very often—not always—to define something as a tax or expenditure change. The important point is consistency. For that reason I quoted the publication of the Office for National Statistics, UK National Accounts Concepts, Sources and Methods, which came down very clearly on this side of the Chamber and not the Government's side in defining whether this was or was not a tax credit. I believe that to be an important point. At the margin these matters may be rather arbitrary but it is important that the definitions given in the document to which I have referred should be adhered to. I shall turn to a number of the noble Lord's other points in a moment.

I agree very much with the noble Baroness, Lady Turner. I do not say for one moment that it is unfortunate that the Government have decided to help the particular group of people affected by the Bill. But there are much simpler ways of doing so than the unbelievably convoluted method chosen by the Government. If there were no disadvantages I would wholly agree with her. The reality is that there are very substantial disadvantages. I enumerated a few earlier. No doubt we shall discuss many other reasons why the system proposed by the Government is not sensible.

The Minister was anxious to say that this was not simply a re-badging exercise. If it were just a re-badging exercise all the arguments about semantics would still hold but it would perhaps not be a matter of enormous significance. But, alas, the noble Baroness as correct: this is not a simple re-badging exercise. The Bill seeks to put into law a far less efficient and more objectionable method. I agree therefore with the Minister that it is not a re-badging exercise; it is more than that. What is more, it is objectionable. We shall wish to pursue the matter.

The noble Lord, Lord Peston, asked a very straight question to which he received absolutely no answer from the Minister. I believe that the answer [hat he should have received was no. He had misunderstood the way in which the Government's proposed scheme is to operate. I hope that he will consider whether the point should be pursued at later stages. Perhaps the Minister can reply to her noble friend. The answer to the question posed by the noble Lord, Lord Peston, is no.

I turn next to a particular point raised by the Minister. I thought at first that it was a slip of the tongue, but I believe on reflection that the Minister was reading a passage stating, "This will enable people to keep more of every pound they earn". It does not do that at all. Perhaps the Minister will admit that she was wrong to say that. What it does is to give people extra money on top of what they earn. As the Child Poverty Action Group rightly points out, it is a straight wage subsidy.

Lord Peston

Perhaps the noble Lord will give way. There is no difference. Essentially, if a person goes out to work—it is some time since I had the pleasure of doing that—what matters is what he takes home. What does the person end up with as a result of going to work? As I understand it, a person will end up with more. I believe that to be the beginning and end of it. Other than the noble Lord's desire to be very precise in semantics—which we can also argue about—the substance is exactly as I and the Minister have described it. Now if one goes out to work one's net position is better than it would otherwise have been.

Baroness Hollis of Heigham

Perhaps 1 may help the noble Lord still further and provide information on the matter. At the moment, if one is on family credit, housing benefit and council tax benefit and one is perhaps within the PAYE system, for every pound one earns there is a deduction. One's other benefits are taken away at different rates. Under the system that we inherited from the previous administration 5,000 people paid 100 per cent MDRs. For every pound they earned they were not a penny better off. Every penny was clawed back in NICs or tax but in particular in housing benefit, council tax benefit and the loss of family credit.

Under the previous administration 130,000 people suffered a 90 per cent. withdrawal rate; 300,000 people suffered an 80 per cent. withdrawal rate; and 750,000 people suffered a 70 per cent. withdrawal rate. If this applied to the better off there would be protests against the disincentive to further effort, entrepreneurship arid all the rest of it. Yet people who are poorly paid are expected to seek to improve their hours and working conditions but suffer deduction rates at this level. Under this Government the 750,000 people inherited from the previous administration who suffer a deduction of over 70 per cent. on every pound that they earn will fall by one third. As a result, about 500,000 people will take home more and keep more at the end of the day. I would have thought that noble Lords all around the Chamber would have welcomed that.

Lord Higgins

We will come to the taper when we discuss later amendments. If the Government simply wanted people to keep more of what they earned, they would have reduced tax rates.

Baroness Hollis of Heigham

I am sure the noble Lord knows perfectly well that the interplay of tax rates and NICs rates, with housing benefit, council tax benefit and family credit, produces a marginal tax rate at the worst extreme of 100 per cent.

Lord Higgins

We can return to the issue of the taper and marginal tax rates later. The noble Baroness is saying that at the moment they would keep more of what they are earning. They are in fact getting a straight wave subsidy which is added to it, which may or may not be as much as the tax which is being deducted and, as I understand it, could be more; otherwise there would be no point in the exercise. We can return to the issue later, but I maintain my position.

The noble Baroness spoke of whether there are advantages or disadvantages to the system she is proposing and whether or not it will be possible to introduce a real tax credit scheme. To some extent she revealed her feelings on the matter when she pointed out that if it were a real tax credit scheme, then it would not appear in the pay packet in the way she described.

Baroness Hollis of Heigham

I did not say that it would be a real tax credit if only it was paid through PAYE. I said that it seemed that the Opposition were arguing that if only it were paid through PAYE, then it would be a real tax credit. I pointed out that although that may seem an attractive proposition, it cannot be easily achieved.

Lord Higgins

If it could be done as a real tax credit scheme, as originally intended, meaning that it would not appear in the pay packet in the way the Government wish, would the noble Baroness be in favour of that? I am not clear about their position. I suspect that those who are enthusiastic about the pay packet argument are less enthusiastic about a real tax credit scheme. I understand that the 26-week system has not been considered by the Government, but it may be possible to introduce a real tax credit scheme. We can discuss these matters later. But the position of the noble Baroness is not precisely that set out by the Government. It is a little unclear.

Baroness Horns of Heigham

I take issue with the noble Lord attributing views to me that I do not hold and have not expressed. Clearly, it would be attractive if this could be seen as an addition to people's wages and be paid through PAYE. The two big obstacles are that PAYE is cumulative and that it affects people who are not in the tax system. It would therefore particularly disadvantage the low-paid. That is why I stated that businesses and the consultative group had agreed with the Inland Revenue that PAYE was not the appropriate vehicle and that, therefore, we are doing it this way. It is still being done through the pay packet by the Inland Revenue but as a separate item rather than through PAYE.

Lord Higgins

The noble Baroness has just made the point: she is saying that if it were through PAYE, it would not then appear on the pay slip as she described it, and to that extent she would regard it as a disadvantage. It is the contrary reason, with respect.

One has some suspicion that because the Government are wedded to the idea of it being done through the pay packet, although as far as the self-employed and couples are concerned that principle is undermined, they are less enthusiastic than they ought to have been, in my view, about it being a genuine PAYE tax credit scheme. The position is not clear.

The proposal of the Chancellor of the Exchequer in the Red Book at paragraph 5.13 is that it will all be integrated and the pay slip at that point will not appear in the form which the noble Baroness is enthusiastic about. Once the major reform comes through, it will be a genuine tax credit scheme, as far as one can gather from the Budget Statement. Can the noble Baroness say whether she thinks that is right?

Baroness Hollis of Heigham

I cannot possibly anticipate what forms or slips or pay packets might look like several years down the line when children's tax credits and others may have been fully introduced. That is, if I may say so, a rather silly question.

Lord Higgins

We have now heard an interesting statement that paragraph 5.13 does not say that this is not going to happen for seven years, which perhaps it should have done because then we would be clearer about the Government's objectives. It would be helpful to receive an answer to the original question of the noble Lord, Lord Peston. We can discuss the other matters on later amendments.

Baroness Hollis of Heigham

The noble Lord, Lord Peston, says he believes he had an answer. If he is satisfied, I do not see why the noble Lord should be dissatisfied.

Lord Higgins

The only difference is that the noble Lord received the answer from me and not from the Minister. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord McIntosh of Haringey

My Lords, I beg to move that the House be now resumed.

Moved accordingly and, on Question, Motion agreed to.

House resumed.

Lord McIntosh of Haringey

My Lords, before we move to the Statement on the NATO summit, I should like to take this opportunity to remind noble Lords that the Companion indicates that discussion on the statement should be confined to brief comments and questions for clarification. Peers who speak at length do so at the expense of other noble Lords.