Tax Credits Bill

HL Deb 23 April 2002 vol 634 cc127-77

3.7 p.m.

The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Hollis of Heigham)

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

Last week, in his Budget Statement, my right honourable friend the Chancellor of the Exchequer made clear the Government's continued commitment to building a welfare state fit for the 21st century. We are determined to improve the support available to families with children, to streamline administration, and to tackle child poverty by targeting help to those who need it most. At the same time, we want to tackle the unemployment and poverty traps by making sure that work pays. Working within the constraints imposed by the systems we inherited, we took action in the previous Parliament to achieve those aims. We introduced the working families' tax credit, which is currently benefiting almost 1.3 million families, and the children's tax credit, a tax cut of up to £520 annually for about 4.6 million families.

Our reforms to date have been a success. However, the practical constraints imposed by the existing systems meant that they could not go far enough. Existing forms of support are divisive. Support for children depends on whether the parents are in work and whether they pay tax. Support for workers with a disability focuses on their disability rather than on the fact that they work; and some people, such as students and student nurses, fall through the gaps between those systems, excluded from all but child benefit.

Existing forms of support are also inflexible. WFTC and disabled person's tax credit are paid as a six-month fixed award, based on family circumstances and a snapshot of income at the point of claim. Once an award has been made, it cannot, except in limited circumstances, respond to changing circumstances and changing levels of need.

So, while the Government are not changing their objectives, we are—with this Bill and with the new tax credits it introduces—improving the way we deliver them.

The new tax credits represent the next, and important, step forward, allowing us to make further progress through a system which is fairer, more inclusive, better targeted and more flexible. The new credits will rationalise the existing systems of support, delivering more effective help to families with children and to working households.

Building on universal child benefit, the child tax credit will tackle poverty and provide targeted support to parents. For the first time, there will be a single credit to support families with children—one framework for income-related support for children, reducing stigma, smoothing the transition from welfare into work, and broadening the scope of support.

The working tax credit will improve work incentives, tackle in-work poverty, and remove barriers to work. It will provide a single, inclusive credit for those in work, so that workers with a disability receive the support they are entitled to under the same framework as other working households; and it will extend support to working households facing poverty without either children or a disability.

Last week's Budget set out detailed information about the structure of the new credits and the levels of support they will provide. That is why the Second Reading was tailored to follow the Budget rather than precede it. Together, the new tax credits will provide initially an additional £2.7 billion to support families with children, tackle poverty and make work pay.

The child tax credit will, in total, target around £13 billion of support to around 5.75 million families with children. The credit will be made up of two elements. The family element will be available to all families with at least one child, recognising the additional responsibilities that come with parenthood. From April 2003, this will be worth up to £545 a year (£10.45 a week). It will be worth double that for families with a child under one year-old—extending the extra support provided to families with a new baby through the children's tax credit down the income distribution so that families on lower incomes who do not pay tax can also benefit. On top of that family element, an additional amount of up to £1,445 a year (£27.75 a week) will be available for each child, tailoring support according to the size of the family. This child element will rise to £3,600 a year (£69.05 a week) for children who have a disability, and to £4,465 (£85.65 a week) for children who are severely disabled.

This is an inclusive system. These amounts of child tax credit will not start to be withdrawn until family income reaches £13,000 a year—meaning that around a quarter of all families will receive the maximum amount of child tax credit on top of their child benefit. Together, this will ensure that these families are guaranteed £54.25 a week for the first child. So a family with two children and income of less than £13,000 is guaranteed support of £92.75 a week.

The family element of the child tax credit will not start to be withdrawn until family income reaches £50,000. Your Lordships will recall I explained that the child tax credit replaces the children's tax allowance. Some 80 per cent of families will receive at least this full family element on top of their child benefit, guaranteeing a family with income of up to £50,000 at least £26.50 a week for the first child. A family will continue to benefit from the child tax credit until family income reaches £58,000.

The working tax credit is designed to tackle poor work incentives and persistent poverty among working people. As I say, the child tax credit is designed to support children. The same level of benefit applies whether one is out of work or in work. One ports it from one to the other. It is a secure, portable bridge of income. As I say, the working tax credit—the adult element—is designed to tackle poor work incentives and persistent poverty among working people. It will broadly replicate the support for adults provided through WFTC and DPTC but, for the first time, will extend support to those on low incomes without children or a disability aged 25 or over and working 30 hours or more a week. In other words, the adult element is available to those without children, unlike the current WFTC, unless they are disabled.

The working tax credit will consist of a basic element for all those who are eligible of £1,525 a year (£29.20 a week). Additional elements will provide targeted support according to household circumstances. For example, there will be additional elements for couples and lone parents worth an additional £1,500 a year (£28.80 a week), and a top up of another £620 (£11.90 a week) for those working at least 30 hours a week. People aged 50 or over returning to work from welfare will also be eligible for extra support from working tax credit for the first 12 months, helping them to settle back into work.

The working tax credit will be available for households with incomes up to a maximum of around £13,000 for part-time workers with children and almost £15,000 for full-time workers. On its introduction, it will guarantee a minimum income from full-time employment for those aged 25 or over without children or a disability of £183 a week for couples and £154 a week for single people. That is well above the minimum wage for the same number of hours. A family with one child and one earner working full-time on the national minimum wage will have a guaranteed minimum income of £237 a week.

Working tax credit replaces DPTC, bringing people with disabilities into the same system of support as other workers, but providing additional elements to recognise disability. The basic tax credit available for a disabled worker will increase to £68.35 a week—around £5 more than would be payable under DPTC. The minimum income guarantee for a single disabled full-time worker will rise from £172 currently to £194 in 2003–04. In addition, work incentives will improve for couples with two disabled workers, as the disabled worker element of WTC will be available for each person who qualifies.

We are also building on the success of the childcare tax credit in WFTC and DPTC by including a childcare element within the working tax credit. The childcare tax credit is already helping around 160,000 families in WFTC and DPTC with their childcare costs—around three times the number who benefited from the childcare disregard in family credit. Levels of employment among lone parents are now at their highest for 20 years. One message comes over consistently from lone parents when asked what is their greatest barrier to work: it is being able to afford reliable, quality and safe childcare.

In designing the working tax credit as a modern mechanism for removing barriers to work, we have listened to what parents and childcare providers have had to say about the existing arrangements, as one would expect. As a result, we will make sure that help with childcare costs, provided through the working tax credit, is paid directly to the main carer, alongside the child tax credit. And, so that couples can decide themselves how to share responsibility for looking after their children, we will allow couples with children to add their hours together to qualify for the 30-hour top-up.

The Government will introduce changes to ensure that the childcare tax credit can in future meet the needs of even more parents. From April 2003–this is something I am sure the House will welcome warmly—eligibility for the childcare element of the working tax credit will extend to those who use approved childcare in their own home, as opposed to a child having to go to a nursery or a childminder outside, benefiting families who need home-based care, such as those with disabled children or parents who work outside conventional hours.

The working tax credit and the child tax credit will form an integrated part of the tax system. Based on annual income for a tax year, they represent a sea change in the way support is targeted. By basing entitlement on annual income before tax and national insurance contributions are deducted—in other words, on gross income—and aligning the measure of income more closely with that used for income tax, the new tax credits will extend the light touch income test currently enjoyed by middle and higher income families—what we all take for granted—to all families.

Assessing income on an annual basis, which the system will do, reduces hassle for claimants, who will be required to report their income only once a year and will be able to use information that is already available for tax—for example, on their P60—to do so. It also provides a fairer measure of income than the "snapshot" approach used in WFTC and DPTC, which bases entitlement for six months on income around the date of the claim.

Looking at gross income for the year—many commentators have not picked up this point although it is vital in the new system—will improve work incentives for second earners, who will be able to get the full benefit from their personal tax allowance when they move into work rather than seeing the effect of that allowance eroded, which can happen now because entitlement to WFTC and DPTC is based on their net, after tax, income. One of the by-products of the older social security system, as noble Lords will be aware, is that second earners have always been penalised by very high deduction rates that go as they move into work; otherwise, their partner would be eligible for support. Going for gross rather than net income reduces the deduction rate. It introduces additional income into and stabilises income in low-wage families. Moreover—in my view, this is extremely important— perhaps three-quarters of lone parents have come from couple families and they might have been encouraged to work through the arrangements while in a couple family. We should give them the best possible financial insurance, should they go on to become lone parents in future, to remain attached to the labour market.

Second earners stand to gain by virtue of going for gross rather than net income. Overall, the move to the new tax credits will mean that the gain to work for a second earner taking a part-time job at typical entry wages will increase by around £14 a week where the first earner is on half average earnings.

The new tax credits will also provide a system that combines continuity of support with the flexibility to respond quickly to changes as they happen, ensuring that support is targeted where it is needed and when it is needed. There will no longer be any need for families to wait for up to six months for their awards to respond to their changing circumstances, as people receiving WFTC and DPTC do now. Where circumstances change after an award of new tax credits is made—for example, if the composition of a household changes or a family's childcare costs change significantly—the awards will be able to respond to that change straightaway.

Awards will initially be based on family income for the previous year, ensuring that claimants have a known starting point and a degree of assurance about the level of their award. But awards will also be able to respond to rises and falls in income in comparison with the previous year—that is, going on to a current year figure—ensuring that resources are targeted effectively and, in particular, that those who experience a fall in income can have their awards increased to reflect that fall and thus prevent any perverse drive to drop out of work altogether.

After careful consideration of the available evidence, having examined similar systems in other countries and having discussed possible arrangements with representative groups, the Government have decided that awards should be able to adjust for all falls in income in comparison with the previous year. That means that recipients who experience a fall in income that will increase their award will be able to inform the Inland Revenue that they expect their income in the current year to be less than last year's, giving them the opportunity to get increased payments when they most need them.

However, we have decided that the system should be less responsive to rises in income. In other words, there is an asymmetry of generosity. Responding to all rises in income could lead to significant numbers of recipients having overpayments of tax credit—through, for example, wage increases or extra hours worked—which would need to be recovered. The Government have therefore decided that awards should respond only to rises in income in the current year of more than £2,500. Any increase below that amount will be entirely ignored. Rises of more than that amount will be taken into account only to the extent that they exceed the threshold. The first £2,500 of any rise will be disregarded. That will mean that the system provides certainty for people who enjoy small rises in income—they will not have an overpayment to make—and that people who are able to increase their income will know that they will see the full benefit of the first slice of their additional income. In other words, if one's circumstances worsen, one can get one's increase in working tax credit and child tax credit immediately; if one's circumstances improve, one need have that figure adjusted for the current year only if the increase is of more than £2,500. That asymmetry allows for a decent response by the Government.

Finally, I should not neglect to mention that the Bill also provides for the transfer of child benefit to the Inland Revenue, as announced by the Prime Minister in June last year. Child benefit is a key part of the Government's strategy for eradicating child poverty. I assure noble Lords that it will remain an identifiable stream of income and universally available. The child tax credit builds on the foundation that is provided by universal child benefit. Universal child benefit remains the response of those without children to support those with children. The child tax credit allows a further redistribution that is targeted at those on lower incomes.

It makes sense to streamline the administration of financial support for parents. Transferring child benefit to the Inland Revenue alongside the introduction of the child tax credit will mean that the Government can deliver a joined-up service to parents, who will need to deal with only one department to get the support to which they are entitled for their children. The majority of the 7 million families who receive child benefit will also receive help through the child tax credit, so it makes sense for them both to be run by a single department. That will help to reduce hassle and red tape for families.

During the previous Parliament, we embarked on a wide-ranging programme of reform of the tax and benefits systems. We had to take action quickly, and we did so. But it is now time to take the next step forward by rationalising and modernising the support that is available to families and working households and by improving the way in which it is delivered. The introduction of the child tax credit and the working tax credit, and the transfer of child benefit to the Inland Revenue, will deliver that next stage of reform.

The new credits provide a fairer system. Awards will be based on family income for the whole of a tax year, giving a fairer picture of a family's financial position than the "snapshot" used in WFTC and treating single earner and dual earner couples alike, rather than continuing the bias in the existing children's tax credit towards dual earner couples. At the same time, however, the new system will improve work incentives for dual earner couples, for whom the fact that awards will be based on gross income will mean that they can keep more of what they earn. Treating income from savings just like any other income means that the system will also improve incentives to save, because families will not be penalised for their savings.

The new credits will also be more generous than existing systems. For example, most families with two children on income support will gain more than £9 a week from the child tax credit. One of the matters that most delights me about the child tax credit—this was not picked up very much by commentators—is that for at least this current Parliament it will be earnings linked, not price linked. A single earner couple with two children working full time at the national minimum wage will receive about £400 a year more from the new tax credits compared to WFTC and the existing children's tax credit.

In addition, the fact that families will continue to receive child tax credit when they start work—with no need to submit a new claim and with the credit continuing to be paid at the maximum rate until income reaches £13,000—will improve security for families as they move from welfare into work.

The Bill introduces a fairer, more generous, more responsive system, which streamlines administration, reduces red tape for families and working households, which has been welcomed by business and which improves incentives to work and save. Those are important reforms that will allow us to progress towards our goals of tackling child poverty and delivering employment opportunity for all—goals that I am sure the House shares. I commend the Bill warmly to the House.

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

3.29 p.m.

Lord Saatchi

My Lords, I thank the Minister for her introduction of the Bill to your Lordships' House. On these Benches we have often said that there is a great deal of expertise in your Lordships' House on matters of this kind. I believe that Parliament is very fortunate to have the Minister, my noble friend Lord Higgins and the noble Earl, Lord Russell—perhaps three of the greatest experts in the land on such matters— to lead on this Bill.

As an introduction, I shall try to give a Treasury perspective to your Lordships. Before doing so, I am told that, under our new rules, I must declare an interest, which I now do. I am a shareholder in a company which provides consultancy advice to the Inland Revenue and I am a director of the Centre for Policy Studies.

Baroness Hollis of Heigham

My Lords, did we accept it?

Lord Saatchi

My Lords, that has yet to be seen. We shall find out.

If Bills were persons, this Bill would be a kind and generous soul, rather like the Minister, who was kind and generous only last week in arranging a personal briefing for many of the speakers in this debate. There, I am afraid, the resemblance between the Bill and the Minister ends. While the noble Baroness is always admirably clear and straightforward, the Bill is the exact opposite: "a monstrous thing", according to the editor of the FT, of "paralysing complexity", in the words of the editor of the Economist.

As the Minister said, there is no doubt that the Bill is well intentioned. It aims to boost the income of people in low-paid jobs. That is a fine and worthy aim and we support it. But, before commenting on the Bill, perhaps I may mention the parliamentary procedure that has brought the Bill before your Lordships' House today. We believe that it sets a new and dangerous precedent on the balance between what Parliament determines in primary legislation and what Ministers alone can decide in secondary regulations.

In clause after clause of the Bill, periods, amounts, descriptions, definitions, rates, tests, entitlements, notifications, records and the whole paraphernalia of this system are left to regulation and to Ministers alone to decide. The fundamentals of the new tax credits scheme, some of which the Minister described today, were simply omitted from the face of the Bill as seen by another place. Who will receive how much and in what circumstances remained a mystery to the elected Chamber. Parliament was unable to judge whether the Bill's scheme would be beneficial or harmful to existing or potential recipients.

I give one example. Clause 8 deals with entitlement to child tax credit, but the elected Chamber was not told who is entitled, who is responsible for a child and which children qualify. All those fundamentals are left for regulations to provide for, or not, on whatever terms the Minister might choose. Ironically, while the elected Chamber could not scrutinise those details, we, the Chamber for whom financial Bills are famously strictly X-rated material, can do so, as we begin to do today. It is odd, is it not? We should like to see a more normal balance restored between Ministers and Parliament, and we shall bring forward amendments to try to achieve that.

I turn to the Bill itself. I would say that no Bill currently before your Lordships' House better reveals the philosophical gulf between the two Benches than this one. I should like noble Lords to consider for a moment a table in the Red Book. It is Table A1 on page 154. It is very helpful as it shows the impact of Budget changes. The first change is in lines 1 and 3: personal tax charges up £4.6 billion. The second change is on lines 18, 19 and note k: personal tax changes down £4.6 billion. The net change is nil, except for one thing.

In that pointless transaction, who benefits? The Government. What do they gain? Power. Who loses? The citizen. What does he or she lose? Independence. The Government like it that way because it puts the Government at the centre of events and centre stage. It is the Government who giveth and who taketh away. Most people believe that the tax system now takes around 39 per cent of GDP, but that is just the end result of the system. The total system collects a staggering total of 53 per cent of GDP. The citizen is then obliged to claim back 14 per cent of GDP—that is £143 billion—by navigating a mass of more than 250 complex tax allowances, reliefs, exemptions, credits, tapers, indexations, disregards and so on, to which list the Bill adds more.

Perhaps noble Lords will follow me for a moment in the strange history of the working families' tax credit. I believe that the Minister called what I am about to describe "sea changes". The Chancellor announced hits intention to introduce that credit in his March 1998 Budget, to take effect on 6th April 2000. But before the first tax credit was paid by employers, the Chancellor announced in his March 2000 Budget that it was to be abolished and replaced by the employment tax credit for working households.

The working families' tax credit had a longer life than the employment tax credit because the latter never even made it to the statute book, let alone into the pay packet. In his Pre-Budget Statement, the Chancellor announced that the employment tax credit was to become the working tax credit. But that was a model of consistency compared to the history of the child tax credit. In the 1998 Budget, the Chancellor announced the introduction of the children's tax credit. That was to begin in April 2001, but it never made it. In his March 2000 Budget Statement, the Chancellor announced that the children's tax credit was to be replaced by the integrated child credit. Therefore, the children's tax credit had the distinction of being abolished before it was even introduced. But sadly, since then, the integrated child credit has itself disintegrated, and we are now left with only the child credit.

Perhaps I may tell your Lordships a little tale about the Bill before us. Under this Government, family credit, which had existed since 1988, has so far been replaced by the working families' tax credit, the employment tax credit, the working tax credit, the children's tax credit, the integrated children's tax credit and the child tax credit. To look at it another way, the average life of a tax credit is six months.

The result is that almost half the increase in government administration costs over the next few years—I am talking about £4 billion—is allocated to the collection of tax or the distribution of benefits. There are 140,000 government employees involved in the process. Yet billions of pounds of benefits and credits go unclaimed by millions of citizens who cannot fathom how to claim them.

The problem of take-up is endemic to the system that we are examining in the Bill. Many cities have a high level of social mobility and high population turnover. For many people in houses of multiple occupation, getting the post is a nightmare. Readership of local newspapers is low compared with that in other areas. The multiplicity of media outlets may be exciting but it means that it is difficult to get a message through to people. In addition, 130 languages are spoken in many cities. Thus, it is especially difficult to reach minority communities, which are among the poorest.

Therefore, the working families' tax credit's take-up has been estimated at 62 per cent. Only 72 per cent of entitled families with children had claimed the children's tax credit by December 2001. This year, following the introduction of the children's tax credit and the pensions credit, it is estimated that a further £2.6 billion of budgeted expenditure on tax credits will go unclaimed. Where is all this money? Who has it? We should very much like to know.

We all know about stealth tax. It is a tax charge unknown or incomprehensible to its victim. The Bill introduces us to a new concept in public finance—the stealth credit. That is a tax relief unknown or incomprehensible to its beneficiary. But there is one crucial difference between a stealth tax and a stealth credit. The stealth tax is unerring in its reach. It achieves 100 per cent of what we call "take up". The stealth credit, on the other hand, reaches only 60 per cent of its beneficiaries. In other words, returning to my table in the Red Book, the £4.6 billion of tax rise from NICs, about which we heard in the Budget, will be paid to the Government, but the £4.6 billion of tax credit will not be paid by the Government.

In a debate in Committee in another place, the Financial Secretary said that the Bill would give us a tax system like a television set; so complicated that no one would understand it. But she said that that did not matter as all people had to do was to turn on the switch. What nonsense. How many of us have to fill in a 16-page application form to turn on our TV? All this complexity might be well and good if it worked in achieving some sort of basic objective of the kind the Minister described in her opening speech. Perhaps that might be some form of redistribution from rich to poor, which would be fair enough, but sadly not. We already know that the Government did not achieve what they claimed they had; that is, taking 1.2 million children out of poverty. According to the latest figures the Government achieved taking out only 300,000 of 2.4 million children officially in poverty.

However, that is only the beginning of the awesome injustice of this system. Let us consider this. The Government regard a child as being in poverty if he or she lives in a household which has an income below 60 per cent of the median. Yet the poorest 10 per cent of people now pay a record rate of between 50 per cent and 63 per cent of their income in tax. The least well off pay the highest rate. It is a mad world with the poor paying higher taxes than the rich. According to Inland Revenue statistics for 2000–01, a total of £3 billion was received from 8 million taxpayers with annual gross incomes below £10,000. Incredibly, the Budget last week adds to the tax burden on those people. On page 12 we find that the poorest people will now pay £1.65 per week more in tax. Is it not outrageous that 3.6 million people, who earn less than half the national average and are officially defined as "in poverty", should pay any tax at all? They suffer not just because their incomes are too low but because even people on low incomes have their already low income further reduced by tax.

At present the Government first tax people on low incomes. They then means test their income; offer them benefits and credits such as these to restore their income back to where it was before they paid the tax; and then finally tax some of the benefits, with the poorest people bearing the heaviest tax burden. Meanwhile, the upper half of income earners, who should have nothing to do with the benefit/credit system, receive 30 per cent of all benefit expenditure. Now, with the Bill, if I have correctly understood it, households on £60,000 per year—that is three times average earnings—can claim a credit.

In the dependency culture at the root of the Bill, almost a quarter of the households in Britain are already means tested for benefits. The Bill and associated measures will increase that proportion to nearly 40 per cent in the next two years for everyone and to between 50 per cent and 65 per cent for pensioners. In a nation of dependent benefit claimants, only 10 per cent of families now fail to qualify for some sort of state hand-out. The Government have bizarrely devised a means-tested system not for the poor but for 90 per cent of families in the country.

As I said, the Bill shows the philosophical gulf between the two Front Benches. In a remarkable essay Immanuel Kant declared that to be civilised is to be grown-up". To be grown up, he wrote, is not to abdicate one's responsibilities to others; not to permit oneself to be treated as a child or barter away one's freedom for the sake of security and comfort. He said that a paternalist government based on, the benevolence of a ruler who treats his subjects as dependent children … is the greatest conceivable despotism and destroys all freedom". He said that unless a creature can determine itself, it is not a moral being. Kant was absolutely definite on this point: autonomy was the basis of all morality. His writings were celebrated models of liberal rationalism. He is a symbol of the enlightenment of the 18th century, yet I would say that his teaching is an appropriate starting point for the examination of the Bill in your Lordships' House today.

Like Locke, Rousseau, Jefferson and most of the champions of liberal democracy, Kant placed immense stress on independence, inner directness and self-determination. He wanted a free man to be able to say, "I am the captain of my soul". This Government want the exact opposite: the people as dependent children; themselves the master, the Bill the instrument of their power.

3.45 P.m.

Lord Rix

My Lords, those who were present at the extremely helpful meeting in the Moses Room last week, conducted so courteously by the Minister, will be all too aware that in discussing the Bill I shall focus my attention on childcare in the home and the effectiveness of the new working tax credit in supporting people with a learning disability who wish to work. It is slightly unusual for me to be debating Treasury matters. I usually find myself in fiscal rather than political exchanges with the Inland Revenue.

I thank the Minister for her explanation of the Bill and the thinking that lies behind it. I am delighted that after effective campaigning by Mencap—of which I have the honour to be president—and other voluntarily organisations, parents of disabled children will now gain tax credits for childcare which has to be undertaken in the home. It is gratifying to know that the Government have listened to the call for change, a welcome benefit to many parents of severely disabled children across the country.

I also welcome the main thrust of the proposals to create a working tax credit which gives additional financial support to people on lower incomes, with special provision for people with disabilities. My concern about the working tax credit, though, is about the continuing lack of employment opportunities for many people with a learning disability. That situation may be improved by greater flexibility in the tax credit regime, but I must remind your Lordships how pitifully few people with a learning disability are afforded paid employment.

Research by Mencap suggests that many people with a learning disability would benefit from financial assistance in employment. The Government's mantra on welfare to work seems to refer only to full-time paid work. That is borne out in the rules for the tax credit system known as the 16-hour rule. That means 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.

But for many people with a learning disability part-time work is a more realistic possibility. Part-time work can also be a source of extremely important training or experience and can develop the self-confidence of a person with a learning disability, a large proportion of whom 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 it can be attributed to the limitations of the individual's disability.

A phased entry into the tax credit would enable claimants to gain a foothold in the labour market by working fewer than 16 hours per week for a limited period. Working out a formula to phase in entry into the tax credit system is no mean feat. Certainly, it would defeat me. Mencap understands the complexities of such a solution. I said that I do not support over-complication of the tax and benefit system; to over-complicate is to lose the main thrust of the welcome proposals. However, I am all too aware that the 16-hour rule may well be set in governmental quick-drying cement.

Therefore, an alternative which may be preferred by the Government is to increase the income support disregard up to, say, £35, rather than its current limit of £20. People with a learning disability may do a limited amount of part-time work under what is known as the income support disregard. That allows them to work for up to four hours at the minimum wage without losing any income support. The £20 disregard was an advance on the previous £15, but did not restore the real-terms value of the disregard 20 years ago. A figure of £35 a week would enable disabled people to work part-time, up to eight hours, without being penalised and provide a fairer and a more progressive entry into full-time employment. If the Minister is not persuaded by the argument for a phased tax credit, perhaps she will give this alternative proposal some consideration. Having benefited from the Minister's understanding and help in the battle for the SERPS inherited rights, I can but live in hope.

In conclusion, I believe that the new tax credits will improve the situation of some low-paid workers and parents with disabled children, but there is a danger of missed opportunity for those who do not conform to the standard picture of working and family life. I look forward to the Minister's response and to the assurance that people with a learning disability will have the employment opportunities which the rest of us take for granted.

3.50 p.m.

Lord Howe of Aberavon

My Lords, I follow the noble Lord with respect for his expertise in the area of this topic. I am all the more conscious of my own current lack of expertise. The Minister and I happened to meet each other yesterday. She expressed a certain degree of surprise at my appearance on the List of Speakers for this occasion.

Baroness Hollis of Heigham

My Lords, I hope that the noble and learned Lord appreciated that it was delighted warmth.

Lord Howe of Aberavon

My Lords, it was not unwelcoming, but I detected a degree of surprise. That was understandable because it is probably almost 20 years since my days in the Treasury when I last grappled with anything as complicated as this issue.

If one goes 21 years further back to November 1964 and to my maiden speech in the other place—here the battle on these issues was joined between Lord Joseph and Lord Houghton, alas both deceased—I asked for a solution to the problem with which we are grappling. I look back with affectionate naivety at the sentences: The solution … must be one of which all in need can take advantage. It must be … simple".—[Official Report, Commons, 12/11/64; Col 1239.] During the time I grappled with these matters, I worked alongside much greater experts than myself who are still around. My noble friend Lord Cockfield—alas not with us at the moment—has forgotten more about this than the rest of us have ever known. He still remembers more than we shall ever know. My noble friend Lord Higgins is another in that category. I therefore touch upon the subject with some diffidence.

I began by asking myself where the money is coming from and how will it be raised to finance this and other munificent matters. In rather an old-fashioned way, I sought a copy of the Budget speech from the Printed Paper Office. I found it a remarkably unrevealing document in all the crucial matters with which we are here concerned. A strange feature is that in its 30 printed pages the symbol for the pound does not appear. It is spelt out in some strange fashion as an Anglo-Saxon word—a "pound". I wondered whether that meant that the Chancellor's word processors do not have the "£" symbol on them. Are they perhaps already equipped with the euro, or even the dollar since his glance is more often in that direction? One would like to know why.

If one looks at the more serious details one finds that the only figure given of the yield, the burden or the net figure of what is produced for any of the tax changes is a single figure for the net yield of all the changes. It is a figure of between £6 billion this year and £8.3 billion in 2005. But the cost, the burden or the changes imposed by particular tax changes are never to be found. One has to go therefore to the Red Book. That has changed a good deal since I last had a little Red Book in my hand. In my last two years in office the two that I produced were 48 and 44 pages in length. They cost just under £5. The volumes produced by the Chancellor this time, on pages twice as large and multi-coloured, are 500 pages in total at a cost of £50. I do not believe that the intelligence available reflects the increase in activity and expenditure.

One of the more notable discoveries is the hugely important part played in raising the revenues for these changes by the scarcely disclosed burden of the 1 per cent payable on national insurance contributions by the employer, the employee and the self-employed. Of the £8 billion raised by that, £4 billion—this is the important point on the revenue-raising side—comes from the employers' payroll tax. I seem to be almost alone in reacting to that by saying, "Haven't I seen that somewhere before?" Indeed, one finds that one has seen it somewhere before. Way back in 1976 when the noble Lord, Lord Healey, was under pressure from the International Monetary Fund, lo and behold he introduced a 2 per cent national insurance surcharge which was payable by the employers. In 1978, still under pressure from the IMF, that was increased by a further 2.5 per cent, as he intended. But the Liberals rode to the rescue and the Lib/Lab pact had the effect of reducing that 2.5 per cent to 1.5 per cent. So we ended up with a 3.5 per cent national insurance surcharge, known as "Healey's tax on jobs". That is what we are now revisiting in this particular burden. I am very anxious that that idea does not spread, if it is not already deeply rooted in the Chancellor's mind. It is 1 per cent this year; it reached 3.5 per cent when they were last at it.

Between 1982 and 1984 in the Budgets introduced by my noble friend Lord Lawson and myself, we got rid of that. It is very important to understand the potential danger of this burden on employers and, above all, on jobs, which is the engine that is driving the generosity to which my noble friend Lord Saatchi has referred.

That is how the money will be raised, but how will it be distributed, and with what side effects? The Minister has talked quite often about an integrated system. Integration is the flavour of her speech if not of the substance which she has been describing. As my noble friend Lord Saatchi has pointed out, the regulations to be made under the Bill set about defining a whole range of "elements", as they are called, defining a married couple, defining what kind of unmarried couple can be benefited as though they are a married couple and defining "relevant" incomes with at least nine different "relevant factors", with power to prescribe a great deal more. All those features are to be prepared in a separate code of regulations, as my noble friend points out, unscrutinised by either House of Parliament but quite separate and distinct from those already in operation for pay-as-you-earn under the income tax legislation.

Speaking quite personally as chairman of the steering committee of the tax law rewrite project, this year we want to rewrite in a more intelligible form all the primary legislation which deals with PAYE. The secondary legislation on that topic is itself so unintelligible that that is also being rewritten, not by ourselves but by the revenue authorities. So at the same time we are rewriting in simpler terms legislation on these very topics dating back to early in World War II. Alongside that, under the legislation now before us power is being given for a completely separate code which addresses the same question: who is entitled, in what way, and to what amount? All the methods of enforcement, discovery, revision and appeal are to be set out in regulations.

However, I cannot believe my eyes because we are now generating two completely separate distinct codes addressing essentially the same elements. I ask myself: how disintegrated can an integrated system become?

The other feature which has already been pointed out by my noble friend Lord Saatchi is the very simple point that this network of claimable benefits will be available to those earning up to £58,000 per year. Only 10 per cent of families will fail to qualify for the examination of claiming or not claiming the benefits available under these provisions. They will be paying marginal rates of 48 per cent in the band between £50,000 and £58,000. It will cover of course childless couples as well and pensioners with a special credit. In saying that, one does not object to the attempt to direct benefits in that way, but it really is an extraordinary jungle. I mentioned possible side-effects, and there are two in particular. The first is the effective abolition of the independent taxation of married women—even if they are not actually married, as it happens, because unmarried couples can qualify in the same way.

In 1968, I was a member of a committee that produced a booklet with the bizarre, patronising title, "Fair share for the fair sex". It was a long time ago and a bit old-fashioned, but the objective was the same. One of the many objectives that we set out was independent taxation for women. In my second Budget in 1980, I produced a Green Paper on the subject. My noble friend Lord Lawson in due course—by 1990— implemented it. That was one occasion on which both my noble friend and I could bask for a moment in the admiration—if your Lordships can imagine—of our spouses and others for having done the right thing.

The introduction of the proposed system, applying to nine families in 10, will require married couples when considering whether or not to apply for such grants to aggregate not only their income but their working hours. All will be revealed. The concept of independent taxation will disappear altogether.

Secondly, what is almost recreated is what was at the heart of Nye Bevan's case on behalf of all people with experience of its impact in South Wales between the wars—the case against the household means test. That is in effect being reintroduced across the canvas—not only will there no longer be single taxable units but there will be a single means test. That is much to be regretted.

Towards the end of the Minister's peroration following her helpful description, she said that as a result of the changes, the Government can deliver a joined-up system. There is a huge inaccuracy at the heart of that. The Government cannot deliver anything; the system will be administered by employers through the pay-as-you-earn system. That is at the heart of the idea of an integrated system. If it is to be done, it needs to be done with much more sensitivity. The Government will not be delivering it: employers will struggle to deliver it; a random sample of people will struggle to claim it; and it will fail to achieve the objectives that we all share.

The noble Baroness may ask me to explain how I would set about achieving those objectives in a different way. We should return to focusing the system on much narrower targets, not spread out the target across the entire income range of the population. We should concentrate on simple objectives—as my noble friend Lord Saatchi often suggests: raising the tax threshold.

The Budget also freezes the threshold for income tax and national insurance. By that very act, a large number of people are brought back into the tax system. Alongside the reduced rate band, that means that still more people are in the tax system than if the threshold were raised.

I must stop reminiscing and draw to a close. In my second Budget I was able to scrap the reduced rate band—the 25 per cent band—introduced by the noble Lord, Lord Healey, and substantially raise thresholds. The reduced rate band is of almost no value at all in helping those in poverty. It is a tranche of lower tax income available to everyone and, by its very existence, it lowers the tax threshold. By that one simple change, I reduced the number of people at the Inland Revenue by 1,300, with a corresponding reduction in the private sector.

So that is my approach: narrow the targets; restore something like the standard benefits available under the simpler system; and make the system manageable, instead of proceeding down this fluctuating path in which any objective that is fulfilled is rapidly swept away.

I say all that with great regret because, as I said at the outset, the objectives are ones that we all want to achieve. The fact that we have all struggled with them for so long shows how difficult it is to achieve them, but the way in which the proposals have been introduced means that in several respects we shall be moving in the wrong direction. I say that with much regret.

4.4 p.m.

Baroness Noakes

My Lords, it is, of course, extremely difficult to follow a speech such as that of my noble and learned friend Lord Howe of Aberavon, whose huge experience and expertise as a former Chancellor and current commitment to the tax rewrite project make him especially well-qualified to comment on the Bill. However, from my much lower base of expertise, I hope to be able to contribute to the debate.

Let me say at the outset that I have no problem in principle with bringing together the tax and benefits systems. But that approval in principle is subject to several important provisos. First, the Government should not pretend that benefits are anything other than benefits. They like to score benefits as if they were negative taxation—thereby fiddling the figures. I am aware that accounting conventions are rather dull material and not normally the stuff of our consideration as Bills pass through the House, but I hope that we can make an exception for the Bill. It is time that the Government stopped cooking the books.

My second proviso is that it is logical to merge the administration functions only if the concepts and basic approaches to measurement and coverage are the same. Here the Bill fails almost completely. The Bill takes the existing social security approach to benefits and sticks it alongside an entirely different approach in the Inland Revenue. The social security and tax elements will come together only in payment of the benefit—where the Inland Revenue will again use businesses as its unpaid tax administrators to shoulder most of the burden.

We should be in no doubt that the systems are quite different. For example, the Inland Revenue deals with taxpayers as individuals. Each submits a return and they are genuinely treated as individuals. My noble and learned friend Lord Howe told us of his contribution to the creation of independent taxation. Obviously, there are some instances in which marriage is relevant—for example, capital gains tax treatment of transfers of assets between spouses—but that does not result in individuals being treated other than as individuals in their own right.

The benefits approach contained in the tax credit system is quite different. In the social security system, the concept of a household unit reigns. If a person is married, he or she loses his or her individual identity for tax credit purposes. Even worse, the household unit also applies to unmarried couples—although illogically not to same sex couples. So the Inland Revenue will deal with individuals as such for tax purposes but as household units for tax credit purposes. It will have to enquire not only into marital status but also the status of relationships which are not the result of marriage.

Perhaps I may give your Lordships another example of a huge difference between the two systems. The tax system taxes income according to a series of statutory provisions laid out in Acts of Parliament. There is a system of schedules and cases for income with clear rules attaching to them. Of course, from time to time, it is necessary for Finance Acts to introduce new rules to ensure that all sources of income are brought into charge. But the system is statutorily based and hence receives detailed scrutiny before it is enacted.

The tax credit system, rooted as it is in the social security system, does not do that. Entitlement to credits is based on a concept of "current year income", but that has no firm statutory base. Rather, as we have heard, it rests on regulations. For example, the regulations under Clause 7 can do several things. They can prescribe income to be treated or not treated as being income for a particular tax year. They can prescribe that a person has income that he does not have or does not have income that he in fact has. The Inland Revenue has no equivalent provision for tax purposes except some specific provisions—usually for anti-avoidance purposes—that are clearly spelled out in Finance Acts.

So a tax credit system might make sense if it took the existing tax basis and fitted social security benefits within it. Or, it might make sense if a more complex synthesis of the tax and social security systems had been attempted. In either case, the taxpayer or benefit recipient would be approached in the same way. The Bill does not do that, and we are left with a real puzzle as to why the Government are bothering to transfer benefits to the Inland Revenue.

One reason may be that the Inland Revenue is more efficient than the Department for Work and Pensions. Certainly, the Inland Revenue has a better track record of introducing new computer systems. Given the department's unimpressive attempts to introduce the new child support system, one might well conclude that it might be beneficial to call that a tax credit and transfer it the Inland Revenue. The regulatory impact assessment makes no claims for greater efficiency; it just says that the Inland Revenue's costs will go up now and costs for the Department for Work and Pensions will go down. It does not comment on the relationship between them. Another reason might be the cosmetic desire to pretend that tax credits are negative tax. Nobody is really fooled by that.

I have come to the conclusion that the real reason is territorial aggrandisement by the Chancellor. The Board of Inland Revenue is his department. The chairman of the board reports to the Chancellor. The tax credit system enables the Chancellor to spread his control way beyond the traditional boundaries of the Treasury. It is classic Treasury power play. As a former secondee to the Treasury and as someone who has worked with the Treasury for many years, I am aware that the prevailing culture and belief is one of superiority over every other department. The combination of that mindset with the ambitions of the current Chancellor is a dangerous one constitutionally. I have concluded that we are not considering the Tax Credit Bill for any sound reason. The right course would be to reject it.

If we do not reject it, we must consider its provisions carefully. As my noble friend Lord Saatchi has already said, there is a big difference in the use of regulations between this Bill and tax legislation. Of course the Inland Revenue uses regulations, but it does so less frequently. PAYE regulations are one example, but others are few and far between. This Bill, however, has 44 clauses in Part 1, 20 of which create regulation-making powers. Virtually the whole of Part 2 transfers a load more regulation powers to the Treasury or the Inland Revenue. Regulations made under the Bill are subject only to the negative resolution procedure. I am sure that we will want to consider that carefully in Committee.

It is fundamentally unsound to conduct virtually the whole of the tax credit system by way of regulation. In addition to reduced parliamentary scrutiny, it results in a system that is inaccessible to the people affected and their advisers. The tax credit system is complicated, and the use of regulations makes it more so. We know that the practice is to issue regulations and, if they are wrong or need to be improved, to issue more regulations amending the earlier regulations and so on. I remind the Minister of the child support order that we debated on 11th April. That order had nine substantive regulations, amending nine different orders, derived from powers in two Acts, one of which had amended a previous Act. Ordinary people and their advisers do not stand a snowflake's chance in hell of coping with that degree of complexity.

The Minister will not expect me to pass up an opportunity to refer to burdens on business. Tax credits are such a burden, especially for smaller businesses. The regulatory impact assessment says that businesses will save £11 million. However, with 300,000 employers, that works out at £37 each, excluding the cost to those businesses of upgrading their payroll system. Even that, however, misses the real point. The tax credit systems are already a huge burden on employers. Whether or not the Government fund the cash-flow implications of the tax credit system, the operation of the system is the real imposition. In its recent paper, The Red Tape Menace, the Institute of Directors called for the Government, rather than small and medium-sized enterprises, to pay tax credits. I3usinesses the length and breadth of this land will say, "Amen" to that.

4.15 p.m.

Baroness Andrews

My Lords, it gives me great pleasure to speak in the Second Reading debate on the Bill, although that pleasure is tempered by the triangulation of expertise on the Front Benches and the fact that I follow a distinguished speech from the noble and learned Lord, Lord Howe of Aberavon. It is a historic Bill, and it would not be so radical or so inclusive had it not been for our Minister in this House, who champions the cause of poor families inside and outside the House.

I am disappointed by the scepticism that has been expressed on the Benches opposite. I heard from another group of experts yesterday in the All-Party Children Group. They represented the whole poverty lobby that has worked closely with the Government to prepare the Bill. First, they spoke, without equivocation, of their appreciation of the way in which their concerns and their expert views about the delivery mechanism and the changeover to tax credits had been listened to during the consultation process. They expressed delight that the Government had gone further—in some respects—than they had anticipated to put money in more accessible places. They expressed their conviction that the abolition of poverty—notwithstanding the debate about numbers—is a non-negotiable part of government policy and said that they were happy to support that. They were confident that the Budget would make "a real difference" to the poorest families.

I have sat through many anti-poverty strategy meetings in the past 20 years. I have never heard such an unprecedented vote of confidence in a government. We have not heard much about families today, but I want the House to reflect on what it means to be in poverty in the opening years of the 21st century. The Family Welfare Association has calculated that, once household costs and bills are paid, the poorest families have £3 a day on which to feed and clothe every child and provide them with the sort of extras that families always want to provide. The Bill is central to any attempt to improve that situation.

Poverty is seamless in its impact. It feels the same whether one is in or out of work. That is why we should have a seamless policy in response. Seamlessness has been elusive; no one knows that better than the noble and learned Lord, Lord Howe of Aberavon. I remember when the Supplementary Benefits Commission was being wound up in 1979, after the failure of negative tax credits. The structure of supplementary benefits was then described as a once-noble strategy that had become surrounded by ramshackle sheds and outhouses that were in danger of bringing it down. We have not made a great deal of progress, but we have responded to some of the things for which the poverty lobby has been asking for a long time.

The strength of the Bill lies in its reliance on evidence and expertise. It is not a technical Bill in the sense that it is incomprehensible. It does not simply re-define the definition of poverty. It deals with some of the historic barriers that keep people in poverty. For years, the poverty lobby begged the Government not only to recognise that all poor families are poor in the same way but to provide a kinder and more responsive system, with simpler assessment and wider access and in which payments are paid to the responsible carer. That will provide greater security and greater dignity.

The noble Lord, Lord Saatchi, had a great deal of fun with evolution and abortion of different forms of credit and their titles. With the best of intentions, there has come greater complexity. Family lives are extremely complicated. There are four separate routes for child payments: universal child benefit; child additions attached to income support and JSA for people out of work; child credits attached to working families' tax credit; and a children's tax credit for people in work. Yes, there are four different credits each applied for separately, each assessed separately, each awarded separately and each award going to make a similar difference in a similar way. The Bill takes a bulldozer to that undergrowth and complexity and it creates a broad highway out of poverty.

The crucial test will be take up. I believe that it will be increased for the following reasons. First, the separation of work credit and child support is long overdue. It puts an equal value and dignity on both. One cannot underestimate the value of symbolism in social security. It is extremely important for people to be treated with dignity.

In terms of the child tax credit, we are moving towards a new definition of "universalism". The great strength of child benefit has been that it goes to every family. It creates a contract of interest in the welfare of the child. Creating a single tax credit with the same level of credit for all children signals the value and the needs of all children. I do not believe that that is a reflection of dependency and I greatly doubt whether many families do so. The decision to uprate the child elements of the child tax credit in line with earnings extends that contract. It means that all families now have a vital share in a growing economy.

Supporting all families, but giving greater help to those who need it through an inclusive test of income and not a means test, which stigmatised the claimant —and I entirely with what the noble and learned Lord, Lord Howe, said about the means test—will encourage take up.

Secondly, I warmly welcome the decision to pay the child tax credit to the carer. It will usually be the mother. The childcare tax credit will also go to the carer. I do not see anything stealthy about that. I can think of systems which are less stealthy than the mother caring for the child and receiving the benefit. I am sorry that the noble Baroness, Lady Castle, is not in her place today because she fought and won that battle in 1975 and she would have some warm words to say about the way the change is being made. It will simplify and encourage take up.

Moreover, unlike the other place which struggled with a fog of assumptions—not knowing how the benefits will kick in and what will be the interrelationship between them—we now know how generous the Chancellor has been. A child credit of £54.25 a week for the first child in families with incomes of less than £13,000 will have a real impact on the family food and clothing bill. And there is something else to rejoice about: the disregard on maintenance has already been shown to have a positive effect on work incentives for mothers eligible for working families' tax credit and the disabled person's tax credit. It goes along with common sense and flexibility, which I believe is written through the paper that accompanied the Budget, and with the equally welcome decision to fence off the capital cliff edge so that people are not suddenly shoved over the edge when they hit the capital barriers.

I turn to the decision to pay credits in retrospect on an annual basis. I, too, believe that that will bring enormous benefits to family management. Trying to stretch a budget across a week is an art form. Trying to stretch it across an unpredictable year is a fine art which few families can manage. Moving on to an annual entitlement will reduce the burdens on families, the crippling unpredictability of income and the burden on the awarding agencies.

That change, above all, is at the heart of the Bill. It will require immense and scrupulous care in terms of the transition process. It will mean providing quality of and access to information and extensive training of new staff. It will mean that we must have the best IT system. It is extremely difficult for any social security system to strike the right balance between simplifying the system and taking into account the chaotic circumstances of family life.

What cheers me is that in the papers I have seen there is a clear determination to minimise the risk at point of transition. The Government have got it about right. Disregarding small losses of income while allowing for rises of less than £2,500 is a good and sensible way to act. It is practical. I am also pleased to see that the preferred method of dealing with overpayments will not be to issue one-off demands. We do not want to fall into the trap which the Australians fell into.

However, there is a major challenge to families in collecting information in new ways. They will need help to do that. It means a change of habit and culture. That was explored at some length in Committee in another place. There is no doubt that it will be much more successfully managed if we do what the Minister in the other place suggested; that is, recognise what real life is all about. Families will need contact and support from groups which are used to providing information and help. The transition process is crucial. I am rather sceptical about the emphasis placed on online applications and would welcome the Minister's views on that and on the process of publicising and supporting the transition.

In conclusion, I want briefly to comment on two aspects of the Bill. I am delighted that by separating out work credits from child credits it is finally possible to help students and student nurses with their childcare costs. I notice that the General Secretary of the RCN warmly welcomed that. She said that nurses are being forced out of nursing because they cannot afford their childcare costs. What a time for nurses to be forced out of a profession that is longing to recruit more nurses and when we have so many mature students entering higher education. We need their skills and we must provide such help.

Secondly, I am delighted that people in work and on low incomes but without children will be brought into the tax credit system, especially young people. The uncertainty and difficulty in getting a first job, acquiring crucial skills and being unable to obtain support on very low incomes is a major issue. Providing an extra £30 a week for couples earning less than £10,000 will make a huge difference.

Finally, I have some questions for the Minister on issues opened up by the Bill. Like the noble Lord, Lord Rix, I greatly welcome the decision to extend childcare tax relief to families using their own homes. I wonder whether this is the time to grasp the nettle and whether the Minister, as only she can, will try to charm the Chancellor into making this the first move in provision for all informal childcare. That will have a profound effect on lone parents in work.

To extend the metaphor, the other nettle is the disproportionate number of large families in poverty. Is it not time to see whether something more sensible can be done for those people and their families? Finally, given the reliance of families in poverty upon passported benefits—a question that was left hanging in the other place—has progress been made on the attachment mechanism to the new important benefits?

I think that we have a historic Bill which raises the prospect of achieving what everyone wants to see; that is, a reduction in the number of families living in poverty and a more effective and appropriate system for doing that. The process is the challenge and it needs to match the principle. But, given the consultation and the way in which it has worked so far, I am more confident that it can be achieved.

4.28 p.m.

Lord Freeman

My Lords, it is a pleasure to follow the noble Baroness, Lady Andrews, because I find myself in agreement with a great deal of what she said. She has tremendous experience in the field. One of the key points she made at the outset of her speech was the value in and the need for a kinder and more responsive system. Members on these Benches would agree with the noble Baroness that it is not a question of why; it is a question of whether: whether what is proposed will deliver what the Government correctly and legitimately want in terms of improved care for those on low incomes but in work and those who have children.

I declare an interest as an adviser to PricewaterhouseCoopers, part of the wider accounting profession which each year has to deal with what seems to be a geometric progression in tax legislation. It is rather like an Irish tide with a strong westerly gale; one is always ho ping the tide will recede but somehow it never does. I thank the Minister for her courtesy in providing a briefing before Second Reading—something devoutly to be wished would apply to other departments. It is greatly helpful to debate on a common platform of facts.

The Minister asked noble Lords, particularly Back-Benchers, to write to her. I shall do so, in the hope that her answers to specific points will illuminate the Committee stage.

My noble friend Lady Noakes and others have already made clear that the Government have embarked on a process of drawing together tax and part of the social benefits administration and cash flows, which are increasingly to be managed by the Inland Revenue. We ought to be clear that we are not entering or re-entering—as the noble Baroness, Lady Andrews, implied—an integration of the tax and benefit systems, to replicate previous experiments with a positive and negative tax system. That is not being offered. However, it does beg the question of what further tax credits are planned. What other aspects of the social benefits system are to be marshalled together with the tax system? There are fundamental differences between them still.

The noble Baroness, Lady Noakes, correctly said that the income tax system is based on a retrospective assessment of people's income that is annually assessed. PAYE is a clever mechanism for extracting payments on account but fundamentally the system is retrospective. The social benefits system of which tax credits are a part is a prospective application of assistance. It can be adjusted during the year, but many of us involved in the practical administration are delighted that we are dealing with the provision of tax credits on the basis of an annual estimate of income. It is either retrospective in certain cases, when adjustment comes within the year, or is an estimate of income for payment during the course of the year.

My noble and learned friend Lord Howe and others pointed out an even more fundamental difference—that since 1990, thank heaven, tax is based on individual assessment. My noble and learned friend's seminal pamphlet published by the Bow Group in 1968 almost doubled overnight the number of young, thrusting professional women joining the Bow Group. His was an important seminal thought that eventually became law in 1990.

A number of anomalies are created because the tax credits system is based on the family unit. When two systems are run in parallel, a number of complications arise. I will not deal with the vexed problem of varying marginal rates of withdrawal of benefit or increases in tax—which is inevitable when two systems are run in parallel.

I want briefly to flag up some of the administrative complications that have, under similar reforms in the past, led to lower take-up. Heavens above‡ A 62 per cent take-up for the working families' tax credit is no credit at all. Three areas need to be addressed early. I have always thought it anomalous that your Lordships' House and another place examine the principles of legislation but do not seem to devote the same time to looking a t how the processes are introduced and the results. We have Select Committees but there are lessons to be learnt from other legislatures—particularly across the Atlantic.

The areas I want to touch on are application forms; the sufficiency of the resources devoted to the reforms by the Inland Revenue; and the transitional arrangements and start date. When the Minister winds up, perhaps she will say whether draft regulations can be made available before the Committee stage. I dare say that is possible. It would immensely assist the progress of the Bill through your Lordships' House if we can see the entire shape of the reforms. Tribute is due to the Minister's Department and to the Inland Revenue on a great improvement in the quality of the consultations on the introduction of the two new tax credits with lobby groups, the accountancy profession and employers—compared with the experience of 1998, 1999 and 2000 in relation to the working families' tax credit.

First, application forms must be easily understandable. The noble Baroness, Lady Andrews, rightly referred to families who are literally in a state of chaos. It is difficult for them to understand forms as easily as your Lordships. Clear English is needed for the regulations, leaflets, forms, code of practice, and the setting out of claimants' rights and obligations. The Bill is already a step forward. I am sure that my noble and learned friend agrees that the text is much clearer than in the past, which goes for both administrations.

Secondly, I am suspicious of the resources being devoted by the Inland Revenue. There will need to be excellent linkage between the Inland Revenue, job centres, local authorities and pension schemes. I am doubtful that the software, hardware or procedures are in place to ensure that that happens. Citizens ought to be offered so-called "better off" calculations. If someone claims for either of the two tax credits in the Bill, will they be better off? I refer to the perverse influence of the marginal rates in certain cases. Personal counselling and help should be provided to applicants. We should learn by experience. The Government should not be too proud to return the legislation to Parliament after three, six or nine months to amend and simplify the procedures.

I share the scepticism expressed by my noble friend Lady Noakes about IT. Sophisticated IT will be needed. I give your Lordships a specific example. When someone comes out of work, he or she will have to apply for income support. The Inland Revenue needs to get that information automatically transferred, probably electronically, so that child tax credit can be changed. There must be a linkage also to local authorities, in the provision of housing and council tax benefits. The mind boggles at the complications.

Finally, 6 million households will move to the new tax credits system by and on 7th April 2003. While your Lordships may welcome the fact that there is to be no overlap between the payment of working families tax credit and working tax credit for employers—that would be a complication—unless the administrative complexities are mastered and we can be assured of a more successful take-up rate, I hope that the Government will consider postponing the implementation of the reforms until the system is working correctly. As we draw closer to the target date currently set, I trust that the Minister will provide the House with information on how successful plans that have been laid for some months now have proved in implementing the new measures.

4.39 p.m.

Lord Haskel

My Lords, I have little expertise in this area, so your Lordships will be pleased to hear that I do not have a lot to say. I particularly wanted to speak in this Second Reading debate because the Bill has something that is rarely seen in legislation that comes before your Lordships. The Bill has vision. It seeks to continue the work of creating a fairer society by helping people to climb out of poverty and get into work. And few would argue with that vision. It even has the support of the noble Lord, Lord Saatchi.

When this Bill was debated in another place, MPs lacked the numbers and tapers without which the Bill was perhaps somewhat academic, but the principles were absolutely clear. Now that we have the numbers after last week's Budget, we can see that guaranteed minimum incomes really will enable people and families to do what the Bill will encourage them to do. I am most grateful to my noble friend the Minister for giving us the numbers in such great detail. Perhaps they were a little indigestible, but none the less they will make interesting reading.

As my noble friend Lady Hollis explained, the whole purpose of tax credits is to eliminate the old poverty and employment trap, where it did not pay people on benefits to move into low-paid work. We have already seen that tax credits do this. My noble friend reminded us that, in a way, this Bill is a development and refinement of what is already in place, but with one important new element. The child tax credit and the working tax credit are entirely separate.

The child tax credit supports families with children, whether the parents are in or out of work. The working tax credit supports low-paid families, whether or not they have children. Like my noble friend Lady Andrews, I think that this is yet another move towards greater freedom and less dependence rather than more dependence, as suggested by the noble Lord, Lord Saatchi.

The children's tax credit and the working tax credit top up the incomes of families and the working poor. In effect, the bottom 40 per cent are gainers while, to a varying degree, the top 60 per cent are losers. Yes, this is an element of redistribution, but it should not be taken in isolation from the education and skills training schemes designed to make the working poor into the working better off, and to help employers fill those skilled vacancies, which seem to be blocking our economic growth.

It is conceivable that the working tax credit on its own would simply subsidise low pay and gain nothing for the economy but, taken together with the minimum wage, this legislation will provide a pathway to work and a whole culture of moving into higher skills and higher pay. Furthermore, it does so in a dignified and unpatronising way.

I make that point because some noble Lords, including the noble Baroness, Lady Noakes, have complained that the working tax credit is an additional burden on employers. Most businessmen are not whingers; they look at these things as a whole. Certainly the burden is minimised by allowances made to small companies for clerical work and annual assessments to reduce the numbers of changes. But businessmen know, too, that they can benefit. Recent surveys have shown that the biggest barrier to growth is no longer the strength of the pound, but the skills shortage. By participating in this whole group of schemes, businesses have the opportunity of attracting new employees who perhaps are not working, and turning them into valuable and skilled members of staff, with all the costs of doing that heavily subsidised by the Government. Surely that is worth a bit of extra administration.

This initiative may well have come at the right time. I think that many businessmen do care. Businesses realise that they need to go further than simply showing social responsibility. Corporate philanthropy is not enough. Now, most companies think that there should be some social purpose to what they do. What more important social purpose could they fulfil than by turning the unskilled poor into the skilled better off? So all businessmen do not just complain about costs; they take a much broader and far more entrepreneurial view. I wish that noble Lords would give them the benefit of that doubt.

The working tax credit will also include an element for the costs of childcare, either in or out of the home. This, too, will help businesses, as it will help low-paid parents who have to work irregular or unsocial hours and so cannot use nurseries or childminders. The credit will be paid directly to the main carer to make it more likely that the money will be spent on the children, which I think is very good.

However, there is one matter in the legislation which does appear to me to be regressive. The noble and learned Lord, Lord Howe, referred to this point. To receive the working tax credit or the child credit, a claim form has to be completed. The income used to calculate the entitlement is the total family income, not the income of an individual. Of course the noble and learned Lord, Lord Howe, pointed out that joint taxation is not new. Only 10 years ago, tax was based on the joint income of all married couples unless one specifically opted out. However, the tax system has been moving steadily in the direction of independent taxation for spouses. Family tax credits seem to reverse that trend and I am not sure that that is something which will be helpful to family relationships. In the modern world, some spouses want to keep their tax affairs separate and private. A way should he found to facilitate that.

In spite of that small point, I welcome the Bill. I welcome it because it is unashamedly progressive and an important part of the overall scheme to move yet more families and children out of poverty. However, it is also a step further along the process of remoulding society into one where fairness and enterprise sit together.

4.47 p.m.

Lord Northbrook

My Lords, one of the Chancellor's major ideas since 1997 has been the integration of tax and benefits. The result of that philosophy has been a whirlwind of activity which has enormously complicated the system of welfare benefits. Noble Lords should cast their minds back to 1997 when, in the area we are discussing, we had the simple concepts of the married couple's allowance, family credit and the disability working allowance. Since then, it has been "all change".

At this point in my remarks I was going to run through all the changes to the regime that have taken place since 1997, but as my noble friend Lord Saatchi has done that already, I shall not bore the House. Instead, like other speakers, I should like to emphasise the complexity of the Government's welfare payments changes since 1997. Since October 1999, the Government have introduced five new tax credits for families, scrapped four of them, and then introduced two further new ones for April 2003. As stated by my noble friend Lord Saatchi, that represents a new tax credit for families every six months.

I should also like to ask the Minister how many more members of staff will be required by the Inland Revenue to administer the new credits. I ask that question in the light of the comment made by my noble friend Lord Freeman to the effect that 6 million new families will be eligible to claim them. I should also like to emphasise the burden to be put on business, as has been done by my noble friend Lady Noakes, in administering the new tax credits.

Like my noble and learned friend Lord Howe of Aberavon, I should like to ask the Minister whether it would not be better to raise tax thresholds than to increase the benefits population. I agree with my noble friend Lady Noakes that to conduct taxation by way of regulation is a bad trend.

I want to concentrate on three areas of the Bill. First, the basis of claim; secondly, concerns about fraud and, thirdly, the treatment in government accounts. First, looking at the basis of claim, as other speakers have noted, the record of WTFC is not encouraging as a pointer to the future. According to the Chartered Institute of Taxation, only one in 10 tax inspectors could fill in the relevant application form successfully. The introduction of the new tax credits will serve only to highlight the already existing complexity. The Institute of Fiscal Studies has the following to say about the new system: Claimants should find the new system very different from existing means-tested benefits, with the Government hoping that an annual system will be easier to understand and administer, and less obtrusive for claimants. But the conflicting aim of targeting the credits effectively has forced the Government to compromise on simplicity and predictability for families whose composition or income changes significantly during a year". Many families will surely find themselves in this position, particularly when they have by good fortune a sudden increase in salary or a good bonus because of a company's good results for the year. The need for claimants to monitor their annual income, average hours of work and, if appropriate, childcare costs means that the Government's desire to provide a flexible and well-targeted system may be increasing the risk of non-compliance.

During its investigation of the new child tax credit the Social Security Committee stated: There is still a considerable way to go to create a tax credit and benefit system which is easy to understand and to use from the recipient's perspective". As many speakers have said, tax experts have warned that many families will fail to claim the new tax credits because they are too complex. David Gibbs, a tax partner at Grant Thornton, said they are extremely difficult to work out. For the average person it will be next to impossible to understand how they work and whether they are due anything and then fill in what promises to be a complex form.

Under the working families' tax credit only 1.3 million out of 1.5 million have claimed it in the two years since it came into being. With the child tax credit and working tax credit, the complexity of the means test will mean that fewer people will take it up. The new credits will mean that the proportion of families in receipt of means-tested benefits will grow, as has been stated by other speakers, from 24 per cent in 1998–99 to 38 per cent in 2003–04. The Prime Minister himself has highlighted the problems of means testing. In 1998 he said on "Breakfast with Frost": There are problems if you move to too much means testing as you can see with pensioners who do not take up income support". Moving on to concerns about fraud, when the working families' tax credit and the disabled person's tax credit were introduced, questions were asked about the scope that they presented for fraudulent claims. The Social Security Select Committee stated in 1999 concern that the potential for fraud in the tax credit system could increase if priority was placed on prompt payment rather than on rigorous checking of eligibility. Frank Field also highlighted the scope for fraud in 1998.

Other tax credit schemes abroad have had the problem of fraud. The working income supplement in Canada saw such problems of fraud that the department is now moving back to a benefits-based system. The US-based earned income tax credit—the EITC system—also saw extensive, fraudulent over-claiming.

The Government have determined that the tax credits are administered through the payroll and therefore they are not subject to the Social Security Fraud Act 2001, which aims to reduce the costs of welfare fraud. A letter from Dawn Primarolo, placed in the House of Commons Library in April 2001, stated that there had been approximately 29,000 WFTC and DPTC investigations. In the region of 300 penalties were imposed. I ask the Minister how that compares with the family credit regime and how much has been recovered by way of over-payment and penalties.

One problem of the current system which has been highlighted is where people have booked places with existing childcare providers. Once they have received sufficient proof of the cost of the childcare, they cut all contact with the childcare provider and pocket the WFTC cash for the next six months. That example is quoted by David Willets and Nicholas Hillman in their booklet Tax Credits-Do They Add Up? It seems strange that the money cannot be paid direct to the childcare provider.

Furthermore, under the new system there will be the further weakness that claimants will not have to provide the Inland Revenue with written confirmation of the childcare costs as they currently have to do, as I understand it, and neither will they have to provide documentary proof of their childcare costs or earnings in contrast to the current WFTC system.

The complexity of the new regime will make it easier for fraud to enter it. Claimants will need to provide detailed information on changes to their annual income, on their average hours of work and on their childcare costs, which could increase the scope for fraud.

Finally, I wish to move on to discuss the treatment of the tax credits in the government accounts. As mentioned by other speakers, in the past family credit was counted as part of social security spending, but now the Treasury counts its current replacement, the WFTC, as a £6 billion tax cut. If all benefits were replaced with tax credits in that way, all benefit expenditure would miraculously disappear from the government accounts. I ask the Minister whether there is a possibility that the new benefits could be categorised as government spending by an amendment to the Bill which would make their overall costs much clearer?

In summary, I have a mixed view of the Bill. I welcome the fact that there are no capital limits, that the tax credit is extended to support about 100,000 families who are currently excluded, including students and student nurses, and that it will support families with young children who are in full-time education up to the age of 19. I am pleased also to note that the child credit will end the unfair treatment of single-earner families.

However, my approval is balanced by criticism, first, of the expansion of means testing, which encourages further dependency and, secondly, of the potential of fraud due to the complexity of the new benefits. My final criticism is of the treatment in the government accounts of the benefit as a tax cut rather than a benefit. I am sure that we shall return to these issues at Committee stage.

4.56 p.m.

Baroness Byford

My Lords, I join with other noble Lords and thank the Minister for setting out the principles of this Bill drawing together the tax and benefits system. If I understand correctly, the main purpose of this Bill is to make up the income of anyone entitled to a payment under it to a higher level than would otherwise be the case. Until the Budget I had thought that that entitlement would accrue mainly to the financially disadvantaged in our society. Indeed, I follow other noble Lords who have reflected that only in fact 10 per cent of families will not qualify for some form of tax credit, which should be of concern to us all.

Those who will receive payment through the good offices of an employer will presumably receive the credit in the same fashion as their pay; in other words, if through bank automated clearing services, then through that system; if by cheque, then by cheque; and if in cash, then in cash. The Bill does not actually specify that and I am surprised that it does not.

I am also surprised that there does not appear to be any form of compensation for the extra work and the bureaucratic hassle that employers will doubtless have to endure in the running of this negative tax collection system for the Government. Will the Minister assure us that employer responsibility will not include any involvement in sorting out problems between employees and the Inland Revenue?

How will the credit be paid to those who do not have handy employers to bear the onus? It will be due to the self-employed, those who have more than one employment and those who have a series of part-time jobs who come in when needed, and those who are temporarily out of work. Will the Minister explain the mechanisms envisaged to ensure that this time the credits are claimed and paid?

Will she also comment on the progress in respect of the doubts expressed by the social security committee in its second report, when it queried whether the IT and the administrative systems would be ready for 2003? Is Alistair Darling's recent announcement of the delay in paying the child tax credit related to these doubts and an acknowledgement that the committee was in fact right and it will not be ready?

Baroness Hollis of Heigham

My Lords, does the noble Baroness mean not so much the child tax credit as child support reform?

Baroness Byford

My Lords, I believe that I do. I apologise. Perhaps I may clarify that later when I have had a chance to look at the papers to which the report refers.

Can the Minister explain the meaning of Clause 23(8) on page 16, which seems to indicate that if anyone claiming a tax credit cannot have a bank account, he or she will lose the credit. It states: If the regulations make provision for payments of a tax credit, or any element of a tax credit, to be made by the Board by way of a credit to a bank account or other account notified to the Board, the regulations may provide that entitlement to the tax credit or element is dependent on an account having been notified to the Board in accordance with the regulations". Can the Minister also clarify the consequences of subparagraphs 9(1), (2) and (3) of Schedule 5, which would seem to allow personal information relating to anyone entitled to tax credit, child benefit or guardian's allowance to be passed quite freely between certain government departments and agencies? Can she explain why that provision has been included in the Bill and, in particular, why it refers to a guardian, who frequently may have no blood relationship to the person for whom the credit is paid?

As the Minister knows, the business of payment has exercised my imagination for many years. I have spoken in debates and raised questions in the House on this issue, and I intend to raise it again. How will some recipients receive their payments? In a nutshell, the Government have decided to save themselves something in the region of £400 million a year by ceasing to pay sub-post offices for the continued payment of pensions and child benefits in cash or by giro cheques to those who urgently need it to be paid in that way. As a result, more than 3,000 sub-post offices have closed and it is rumoured that another 3,000 are due to go.

A sub-post office is a franchise, and the franchisee pays for the privilege of holding that franchise. When the business is rendered non-viable, he or she receives no compensation, no redundancy, and the business cannot be sold because there is nothing of value left to offer. The sub-postmaster goes to the wall and his customers have to travel further to receive their state entitlements. In less than two years from now, they will be unable to draw their benefits except through a bank account.

It sounds simple—"Get yourself a bank account so that we can pay your benefits into it and save the state some money"—and yet the National Association of Citizens' Advice Bureaux still reports monthly that many of its clients are refused bank accounts or are having insurmountable obstacles to opening them placed in their way.

I have asked before and I ask again today, how will entitlement benefits pass from the Treasury to the pockets of the poor? How will that happen? Can we produce a simple diagram or flow chart which shows the process from the collection of tax to the disbursement of benefit for every class and subdivision of our population?

The poorest of our population are under the greatest threat. Even now, many of them pay out a great proportion of their benefits and entitlements in order to get to their sub-post offices to collect the amounts due to them. In this country, if you pay your bills on time, save up for what you want until you have enough money to pay for it and eschew the finance houses, you will find yourself refused credit should you ever need it. Similarly, a credit reference is an essential part of the clearance process for a bank account. Under all the systems of which I have so far heard, no credit history is almost as bad as a lousy record. Those who are reasonably expert in this field calculate that up to 2 million people will not qualify for a bank account. In her response today, will the Minister make a definite statement about the method of payment of these benefits?

What restrictions will be placed on the passporting of other benefits? In the past, for example, entitlement to family credit automatically opened the door to benefits related to NHS costs and to help with certain travel costs—for instance, for visiting relations in prison. Will the Minister confirm that restrictions are intended? Will she spell out what those restrictions may be?

Can the Minister also explain how and why a net family income of £11,250 has been chosen? It seems a little low in the light of the Chancellor's generosity over the child tax credit limits.

In conjunction with the Budget Statement, the Bi11 seems to open state aid to many families earning rather large joint incomes. At the same time it does not appear to grant proportionately more benefit to the less well off and those lower down the income scale, a matter to which other Lords have referred.

I am, as always, concerned for those for whom accessibility is a problem. As I have mentioned, it can be a problem because of distance; because of a lack of transport or the cost of transport; because of the complexity of the changes for those less well equipped to understand and insist on their true entitlement; and, to a certain extent, because of the lack of detail and clarity on the face of the Bill.

Many noble Lords have referred to the low take-up of the working families' tax credit—62 per cent only. I, too, wish to pick up the point raised by the noble and learned Lord, Lord Howe of Aberavon, on the question of independent taxation for women and moving towards a joint payment to the family. If they prefer it, will a family be able to have the child benefit paid directly to the carer through a separate account rather than having it paid into a joint account over which the other partner may have greater control? We have fought for many years to ensure, particularly with child benefit payments as they were, that benefits go to the carer in an unthreatened way. My concern is that making payments in the way envisaged by the Government could jeopardise that freedom, which has been gained at some cost.

Will the Minister comment on what the Government consider will be the cost of introducing this new legislation? In 1992–93, the Government spent some £4.2 million to promote the take-up of benefits; by 2001–02, that had risen to –26.5 million. That is a huge increase in spending on advertising to encourage take-up, and yet we know that take-up is low, with many families not taking up their entitlement. As to unclaimed benefit, some –2.55 million was spent in 1998–99, which had risen to more than £3 million by 1999–2000.

I welcome parts of the Bill but I am concerned about the costs. The Minister will know—I have raised the issue with her many times before—that I am extremely concerned that those on lower incomes should not be put in double jeopardy by having to spend a high proportion of their benefits on getting to a post office to claim them.

5.9 p.m.

Earl Russell

My Lords, in some ways the Bill is a little like a hedgehog. One very hot summer night I woke up and came downstairs without any slippers—and rashly trod on one. Underneath the rebarbative exterior, I found a very small, very soft, very pink and very innocent object concealed in a welter of ladders and half-empty paint pots and all the other objects one has around the fringe of a house. The Bill is not nearly as bad as it looks.

People say that the Bill is difficult. Yes, it is—but that is mainly because the concepts, the terminology and the way of thinking are in many ways unfamiliar to us. For those of us who have experience of the United States' tax system, it is considerably more familiar. The basic distinction between a tax credit and a tax allowance is that for a tax allowance you get back the 40 per cent or whatever the percentage is; for a tax credit you get back the whole thing.

One of the skills one learns in opposition is that of seeing all hell in a grain of sand. I do not think that the Minister would entirely acquit me of having any of that skill. However, since I have been working on the Bill, between last Saturday night and now, I have been able to see rather fewer grains of hell than I could previously. That is an unusual experience when dealing with a Bill. In that context, I congratulate the noble Baroness, Lady Andrews, on the determination with which she stuck to evidence in the face of a House whose general mood was at the time rather hostile.

The other speech of the day has been that of the noble and learned Lord, Lord Howe of Aberavon—which might well have been subtitled, Look on my works, ye Mighty, and despair!". The noble and learned Lord made a perfectly rational case for that view. But if we had all despaired every time it was rational for us to do so, none of us would be here now.

I am talking of circularity. I cannot help remembering the noble and learned Lord's first Budget, when he offered us income tax cuts in order to pay our VAT bills. That was a circular transaction. What we have here is not a pure circle; it is a spiral. It is the transfer of money from the childless to the childed. That is an approach in which one can see a purpose. The whole of the funding of the education system is that. A House which has in the past been wholly hereditary cannot with great ease condemn that principle totally. So the fact that there is an element of circularity is not fatal.

The noble and learned Lord complained, perhaps with more justice, about a tax on jobs. But you cannot have, at one and the same time, a total ban on a tax on jobs and a total ban on any increase in tax on income. We on these Benches believe that income is the fairer and more sensible place to put the tax. But you must be able sometimes, as a point of principle, to increase revenue. If you are to be banned from doing it in one place, you must be free to do it in the other.

In the course of tackling some very real problems, we run into some of the thorniest problems in the social security system. We did not create them; nor did our predecessors. Many are in the nature of the case. If we do not get it right first time, I do not find that particularly surprising. The noble Lord, Lord Saatchi, criticised the Government heavily for changing their mind and changing their policy—as indeed they have done on some points with some rapidity. But we cannot have this both ways. Either we criticise them for refusing to learn from experience, or we criticise them for changing their mind. What do we want? Both are mistakes; but I would rather they made the mistake of changing their mind rapidly than of not learning from experience. If there is any criticism to which the Bill is liable in that area, it is the second.

The general idea, as the Minister put it, is to make work pay. I have noticed that most of the fiercest critics of the Bill—notably the noble Lord, Lord Saatchi, and the noble Baroness, Lady Noakes—were not Members of this House during the Parliament of 1992–97. The Minister will remember the debates we had in that Parliament on poverty traps and the constant refrain of the people who were worse off because they were working. I should like to think that during those debates we were of some assistance to each other.

It is that thinking that has helped to produce the Bill. That is why there is such long tapers. The Minister always used to warn me that we could not make this approach work unless we made the tapers long enough to make it very expensive. She was right, but it is on the whole better that people should be better off by working than by not working.

I remember an interesting conversation with my noble friend Lady Williams of Crosby in the spring of 1997, shortly before this Government came to office for the first time. She said that they had become very interested in the principle of the tax credit—about which, from her American and Harvard experience, she knew a good deal. She said that it was a good principle, and that I should view it with a cautious sympathy. She said that it would be necessary to ensure that. in their enthusiasm for the principle, the Government did not neglect the interest of those who were unable to obtain work.

In the Bill—the first of the tax credit Bills of which I have been able to say this—that point has been taken, and I am very glad to see it. The Chancellor has brought together two basic principles. One is all the various forms of support for children which people receive whether or not they are in work; the other is the support for low-paid work—which encourages work. So he answers the point made by Roy Hattersley on "Any Questions?" two weeks ago; namely, that the Government had done a great deal for the poor in work but practically nothing for the poor out of work. I should not like to think that this is the Government's last word on the subject. I very much hope that it is not. However, it is a word that I am extremely glad to hear.

The problem of poverty traps is not the whole story of the benefits system. I should not wish the Government to become obsessive about it. However, I shall not dwell on the other matters that I should like them to be thinking about. The Minister knows perfectly well what they are.

I am glad, like my honourable friend Mr Webb, about the decision to pay the benefit to the main carer rather than through the payroll packet. The decision to pay such benefits through the payroll packet was in order to teach people the importance of work. I do not believe t hat that needed doing. The importance of work, if you have been out of it for a long time, is social as well as financial. It is a lonely job being stuck at home all day, especially if your only company is that of children too young for conversation. Such a decision was unnecessary. Also, it was proving a considerable difficulty between employer and employee.

The National Association of Citizens Advice Bureaux reports several recent cases of employees being dismissed because they were claiming the working families' tax credit. That really will not do. The association has produced a proposal for a fair employment commission which seems very reasonable.

We hear a good deal about burdens on business. There are burdens on everyone who has responsibility—some welcome, some unwelcome. They should in all cases he kept down when possible. But one cannot live in society without carrying burdens. Employers have to accept that as much or as little as the rest of us.

It does not seem that the system of payment through the payroll has been ideal. It has been suggested that we deal with the matter by leaving out Clause 21(4). That is one possible way of amending the Bill, but there will be others.

I was also interested in what the noble and learned Lord, Lord Howe of Abe rayon, said about thresholds. Exactly the same point was made in another place by my honourable friend Mr Webb. The answer to the problem of how to work it out without an excessive burden is by increasing the tax burden on those at the top of the scale. We would do it by an extra tax on those earning more than £100,000 a year, who I hope will not plead poverty. It can be achieved so that the effect on people in the middle of the scale is pretty well tax neutral. If the complications of the scheme prove greater than we fear, the Minister might want to think again about the suggestions of my honourable friend Mr Webb. They were kindly met and are worth considering.

When she abandons the principle of payment through the payroll or creates an alternative, the Minister will find that there is some problem about who the main carer is. I recall one large happy family featuring two couples who had swapped spouses. They spent the summer together in a large country house, all looking after each other as they ran into each other. The primary carer was the person who happened to be nearest when the boy fell over and cut his knee. The Minister would have some trouble working out who the primary carer was in that situation. I am not asking her for an answer now. We shall have to consider the issue in Committee. However, I should like at least an assurance that she is thinking about it and that she knows that it is a difficulty. There is not always one single person with primary care for the children. The way family law is moving now, we do not feel it right that there should be. After a divorce or separation there should, when possible—which is not always—be a continuing responsibility resting on both parents.

A great deal of the rest of the comment on the Bill comes under the heading that I have put clown confusingly in my notes as "thorns and roses"—opposite in their effect, but closely associated in their appearance and therefore confusing to decide how to handle. Change of circumstance is one issue under that heading. There is no right way of handling it. admire the way in which the Government have tried to tackle it. I do not know how it will work out. I ask the Minister only to continue to keep the issue under review and to keep in touch with my honourable friend Mr Webb, who has done a great deal of constructive thinking about it.

I also ask the Minister to bear in mind the problems raised by my honourable friend about the burden of keeping records. I recently found myself in the process of doing my annual tax return, but discovering where among the litter of parliamentary Bills and White Papers all my various old cheque stubs are is not quite as easy as I would wish. If I had a large number of young children present as well, it could be well nigh insuperable, but that would not be evidence of any fraud on my part. We should think about the burden of record keeping that we are putting on people.

I agree with the noble Baroness, Lady Andrews, about passporting. We also need to think about passporting for medical equipment. My mother in law, who is 92 and has angina, relies on a nebuliser. She is not on benefit, but if she were she would find it very difficult to afford, because it is an expensive piece of equipment.

I am tempted to imagine that I see the hand of the Minister in the provisions for the disregard of maintenance as income. If so, I ask her to accept my hypothetical congratulations.

I share the concerns of the noble Baroness, Lady Byford, about the commencement date, mainly because I am not at all certain that the universal bank will be up and running in April 2003. I agree with the noble Baroness about the closure of sub-post offices, which is becoming a disaster. If the system were running with neither sub-post offices nor the universal bank, we could have a very nasty situation. If I were a Minister, I would have a contingency plan. I dare say the Minister does. I am not sure that she is going to share it with us, but I should be awfully glad to know that she has one. The more you have contingency plans, the less you need them—they are like umbrellas.

We may also have to think through leaving out Clause 24(2) about a small business exemption. This comes back to the problem of the payroll and burdens on business. I hope the Minister will also consider leaving out Clause 38. After all, that would only be following the example of JSA, which can hardly be regarded as quite such a wild and radical example. That is one case in which the point made by the noble Lord, Lord Saatchi, about the regulation-making power is clear. Entitlement can be changed at a stroke of the Le Pen, if noble Lords will forgive the phrase.

There are two sections of tax credit. The credit for children is justified by need and the credit for work is justified because earned. Leaving either of those out would be a potential injustice. I hope the Government will not lead their successors into that sort of temptation.

I also hope that people will think about the point that has been made by several noble Lords about housing benefit taper. There is also a problem with requiring different information to be notified for tax credit and for housing benefit. The complication of preparing two sorts of record for the two sorts of submission makes one worry. However, I have no answers to the problem. If the Minister, any other noble Lord or any outside body does, I shall listen with great interest.

I hope that the Social Security Advisory Committee will apply, as it has done to other matters that have been transferred to the Treasury.

The noble Lord, Lord Rix, is right. I hope that the Minister will listen to him. I do not know whether she can do it in this Bill or whether we shall have to do it in another. One keeps hoping for finality, but in this life it does not happen, alas.

I welcome the Bill. There is a great deal of work to do on it. The problems will not be over when we have done it, but we are attempting something that is well worth attempting.

5.28 p.m.

Lord Higgins

My Lords, this has been a fine debate. However long one has been involved in these matters, one cannot wind it up without feeling that some diffidence is appropriate. When I first saw the title of the Bill, I had a strong sense of déjà vu. As long ago as 1972, the then Chancellor of the Exchequer, Mr Anthony Barber, as he then was, put forward proposals for a tax credit scheme. They were followed by a Green Paper on the subject later that year, which was devised by the noble Lord, Lord Cockfield, as he now is, who was with us earlier this afternoon. It was then examined by a Select Committee whose most prominent members were the noble Lords, Lord Barnett and Lord Sheldon, and the noble Baroness, Lady Castle, as they now are.

Alas, despite that Select Committee report, the incoming Labour government dropped the whole idea. Now, many years later, we find ourselves again with a Tax Credits Bill, although one must stress, as my noble friend Lord Freeman did, that whereas the previous scheme was a genuine negative income tax or tax credit scheme, the proposals in this Bill are not. It does, however, reflect the Chancellor's obsession with the idea of tax credits. It has also been combined with his vacillation.

I shall not repeat the long list of changes we will have experienced over the four years. My noble friend Lord Saatchi has spelled them out, and my honourable friend Mr Willetts—in a fine pamphlet dealing with this matter—has listed them. Indeed, the changes are to be found in Clause 1. Nevertheless, to introduce five new tax credits, abolish four of them and introduce another two does not exactly show the firm hand of government. That brings me to two other points.

First, the vacillation has been an extraordinary waste of legislative time. Although not all the proposals have been dealt with in legislation, much of what the Minister and I have debated in recent years has now been overtaken by this scheme. It is not—as the noble Earl, Lord Russell, has suggested—a matter of the Chancellor learning from experience and then changing his mind. The proposals have not been given a sufficiently long run to enable one to learn from experience.

The second effect of the Chancellor's changes of mind is an increase in the burden on small businesses, which find that the problems they have to deal with are constantly changing. The Bill will place a very considerable burden on business because of the proposal that these tax credits—I prefer to call them benefits-should be paid through the payroll. As my noble friend Lady Byford pointed out, there are real difficulties in that, particularly in relation to opening bank accounts and the problems with credit rating agencies which I myself raised with the Minister just a short time ago. There is a very considerable burden on business.

There is also some obscurity about the administrative cost of the proposals to the Government. Page 39 of the Explanatory Notes states that, The annual administration costs in relation to tax credits cannot be determined until the rates of the new tax credits are set". They have now been set. Can the Minister please tell us what those administrative costs are expected to be?

The Bill is one of great complexity. My noble friend Lord Saatchi has advocated that we should deal much more in this House with financial matters. My own feeling is that this Bill is actually a Money Bill in the strict sense of the term. Regardless, it is fortunate that we are dealing with it. Because of the way in which the Government have handled the matter in another place, whole chunks of the Bill have received no consideration there at all. Perhaps the Minister will confirm that the whole of Part 2 did not receive any scrutiny in another place because of the way in which the Bill itself was—I use the euphemistic term employed by the Government—"programmed". We shall have a considerable task in scrutinising the Bill, but we shall have to examine it very carefully.

As a number of noble Lords—particularly my noble friend Lady Noakes—have pointed out, the Bill itself is bedevilled with regulations. A great deal of what is to happen will appear in regulations. The Select Committee on Delegated Powers and Regulatory Reform seemed to have been somewhat placated by the fact that the regulations in the first instance will be subject to affirmative resolution, although the subsequent ones will not. However, I feel bound to say that I do not think that that is the same as having them in advance. .I very much hope that, as the noble Lord, Lord Freeman, said, we will have them in advance of the Committee stage, when we can debate and if possible seek to amend them. Simply having a yes-no vote, even on an affirmative resolution, does not enable the House to ensure that the initial set-up is appropriate.

As I said, the Bill is greatly complex. Inevitably, that will result in a number of consequences. As many noble Lords have pointed out, the first consequence is the problem of low take-up—which is a very serious problem indeed. Reference has been made to what is happening in relation to the working families tax credit. Perhaps the Minister can confirm whether the quoted figure of, I think, 62 per cent is correct. There is also a very real problem in estimating the proposals' overall operation cost, which I understand is estimated at about £2.7 billion. As that estimate must have been based on assumptions about take-up, will the Minister tell us what assumptions have been made about take-up of the Bill's two major benefits?

The other problem is fraud, a matter to which another place did give considerable attention. As my noble friend Lord Northbrook pointed out, of about 29,000 investigations, there have been only about 300 prosecutions. It is a real problem because the complexity and the payment-payroll link will allow considerable scope for fraud. Consequently, however, the Bill provides for the imposition of pretty severe penalties.

I am sure that the noble Baroness, Lady Andrews, will be aware that there is concern in the Child Poverty Action Group and elsewhere at the increase in penalties accompanying the change from a work and pensions regime to a tax regime in which the penalties are clearly much more severe. As the Child Poverty Action Group rightly points out, although we must all be against fraud, one must take account of the fact that there is a distinction between a tax imposition which is determined as against a benefit which is to be claimed. They are not the same, and I am glad to see that the noble Baroness agrees with us on that. We shall have to pursue the issue in Committee.

One point which has come out very clearly in the debate is the great extent to which Government intervention in individuals' affairs has been increased. Until now, we have had a social security system that works on a set basis and a tax system that operates at the higher income levels. However, there is a pretty large group in between who do not fill in self-assessment forms and are not involved with the benefits system. The size of that group will now be very significantly reduced. Perhaps the Minister can give us some idea of how many extra people will—I hesitate to use such a pejorative phrase—fall into the clutches of the Inland Revenue? There will be very considerable government intervention in individuals' lives, requiring individuals to respond in a very complex situation.

There is no doubt at all that the Bill provides for a substantial increase in means-testing. The Minister invariably objects to my using the term means-testing and prefers use of the word targeting. The reality, however, is that people will be "targeted", to use her word, up to an income of £58,000 annually. That is some targeting. It is also a very real problem.

As this scheme is designed to accompany improvements in health expenditure and so on over 20 years or more, I should perhaps take a slightly longer view. At some stage—given the overall crisis in pensions and so many people on means-tested benefits, and if we are to continue with the type of tax imposition announced in the most recent Budget—we shall have to ask who is going to pay for all this. As a longer term view, that is an interesting proposition. My noble and learned friend Lord Howe of Aberavon asked who would pay for the measure. That is a matter which we shall need to consider carefully.

If one looks at it in broad terms, I suppose one can say of the Budget that the whole of the health expenditure will probably be funded by the increase in taxation on companies and the rest of the increase in taxation—a high percentage of it—will pay for the costs incurred by the Bill's provisions. In some ways one may say that is a good thing when one has regard to the effect of those provisions on child poverty. The noble Baroness, Lady Andrews, referred to that matter, as did the noble Lord, Lord Rix. I hope that the Minister will comment on the 16-hour rule and related matters.

On many occasions recently we have debated the whole question of child poverty. The noble Baroness, Lady Andrews, was hopeful that the Government's measures in the Bill would have an effect on child poverty. Clearly they will have some effect. However, if one considers the Government's record on that matter, that is a different issue. At the previous election the Labour Party's manifesto stated, Over one million children have been taken out of poverty". We debated that matter on many occasions. It is not the case, partly because the estimate was reached by various outsiders on an academic basis but also because it was based on the number of people who might have fallen into poverty if the Government had not done anything. Indeed, the latest information from various outside bodies shows that the figure was probably less than half that which the Government stated in their manifesto had already been achieved. Therefore, the Government's record as regards cutting child poverty is open to considerable doubt. However, we shall have to see how the measure works out in practice despite the substantial costs involved and the imposition on taxation, in particular national insurance contributions.

I hope that the Minister can clarify one further point. I refer to a matter of constant contention between the two sides of another place and this Chamber; namely, as regards treating these matters as increases in public expenditure, not as reductions in taxation. It is therefore interesting to note a change in the Government's attitude on page 216 of what once upon a time used to be called the Red Book. The relevant wording is an incredible example of weasel words. The document states: The Government has consistently argued that tax credits paid through the pay packet should be classified as negative taxation". However, what they actually do is to go part of the way towards the argument which we on this side of the House have put forward and closer to the OECD definition of what constitutes public expenditure and what constitutes a tax reduction. The Government now propose to count as public expenditure a benefit which is paid out, a tax credit, which is not deducted from tax because the individual concerned does not pay tax, whereas if it is a deduction from an individual's tax, they will count that as a tax deduction. What percentage of the total involved in this operation does the Minister believe will constitute a genuine tax credit in the sense that it is deducted from tax as opposed to being simply a benefit which is paid out?

In many ways the Bill has admirable objectives. It is always difficult to oppose a measure whereby people receive taxpayers' money. One is looking at one side of the equation in the Bill and not at the other. My noble and learned friend Lord Howe of Aberavon was right to ask where the money is to come from. I am a little confused to the extent that the money coming in looks as though it will all go into the National Insurance Fund, which is devoted either to the health service or to pensions. I am not at all clear how it is suddenly switched into the credits. However, I noticed with interest that a few days ago the Leader of the House in another place said that there was to be a national insurance Bill which, apparently, is related to the Bill we are discussing. Perhaps the noble Baroness will tell us what is likely to be in that national insurance Bill and whether it is related to the Bill we are discussing.

In his opening remarks my noble friend Lord Saatchi set out clearly our objections to the Bill. They are fundamental but we must at least hope that the Government are now creating a framework which will remain stable for a reasonable length of time. There is, none the less, much scope for improving the Bill which is before us. We shall do our very best in the course of the Grand Committee—I must say that it is rather strange to deal with such a major Bill in Grand Committee—to ensure that it fulfils its admirable objectives as far as possible but also to ensure that many of the disadvantages which have been pointed out in the course of the debate are taken into account and that the Bill is suitably amended.

5.46 p.m.

Baroness Hollis of Heigham

My Lords, I am delighted that we have had such an interesting and in some senses unusual debate. I particularly welcome—I am sure that the noble Lord, Lord Higgins, and the noble Earl, Lord Russell, will agree—hearing the voices of the noble and learned Lord, Lord Howe of Aberavon, and others who do not usually contribute to more conventional social security debates. It is refreshing to hear different perspectives.

In winding up the debate, I state the usual proviso that so many questions were asked that I simply cannot answer them all in the time available without sending your Lordships to sleep even earlier than would otherwise be the case. I shall write to those noble Lords whose questions I cannot answer tonight. Apart from making some general comments that I cannot resist, I should like, first, to pick up the points about Treasury issues, tax, social security, integration and national insurance, then, secondly, to go on to questions about the particular form of tax credit we are discussing, particularly as regards means-testing and take-up, which your Lordships pursued. I want to address the implications for disabled people. I then want to look at issues of accessibility in terms of the online payment methods that the noble Baroness, Lady Byford, has gallantly fought to ensure are available. I then want to discuss a favourite topic of your Lordships' House—I refer to burdens on employers—before picking up the point about fraud which one could perhaps have anticipated and some structural points before making some final comments. I hope that your Lordships will accept that I shall try as best I can to pick up as much as I can within that general framework.

I am particularly glad that the noble Earl, Lord Russell, welcomed so much of the Bill. I am delighted that the more work he did on it, the more supportive he became. That is not always the history of social security legislation. Therefore, I am particularly grateful for his warm remarks.

I refer now to the speech of the noble Lord, Lord Saatchi. I was intrigued by the amount of time he devoted to Kant. He made the point that Kant argued that moral adulthood meant no means testing, as far as I recall from my reading of Kant. But, of course, Kant wrote before the introduction of income tax which was introduced in the Napoleonic Wars by a Tory as I recall and, when scrapped by the Whigs—Liberals—was reintroduced by another Tory, Robert Peel. I wonder, therefore, whether the noble Lord will be quite as keen to quote Kant in the light of the experience and history of income tax which I am sure Kant would also have deplored.

I turn to the comments made by the noble and learned Lord, Lord Howe. I believe that he identified some of the same issues in his maiden speech back in November 1964 when he tested the possibility of whether a negative income tax might allow for the problem of selectivity without stigma, as I believe it would be termed today. I believe that in 1964 he called on all Members of the House not to condemn proposals simply because they involved a test of means. He argued that we should respond to differing needs as well as to differing means and that, as a result, the package should ultimately have a real flavour of humanity. I am happy to commend the Bill to the noble and learned Lord on precisely those tests. I hope that he agrees with my argument.

I was intrigued to see how extensively the Politeia pamphlet. by David Willetts was quoted. I am sure that Mr Willetts would be delighted that it was read so widely by the people who mattered; that is, those on his own side. That, of course, is not always the case.

I turn to the first substantive point, which involves the interaction between the social security and income tax systems and which raises questions of tax. The noble Lord, Lord Saatchi, said that the tax burden was falling on the poorest. No, my Lords: those earning below the personal allowance have not been affected by the Budget changes to NICs and income tax. The tax credits system means that even after allowing for the Budget's changes to NICs, a single-earner family on medium earnings with two children will be £3.90 a week better off. A single person aged over 25 working 35 hours at the minimum wage will be more than £20 a week better off.

We have to operate in that way because, as the noble and learned Lord, Lord Howe, identified—and as the noble Earl, Lord Russell, confirmed—the matter is nominally complicated in the Bill because one is trying to bring together the financial consequences of the tax and national insurance systems when we know that earnings and wages do not reflect family size and that income tax is disaggregated but that tax credits seek to attend to family needs and family means. Therefore, one is integrating earnings and wages—which bear no resemblance to needs or means—an income tax system that is disaggregated and a social security system that is based on households. That is why, as the noble Earl, Lord Russell, rightly identified, we have to deal with the situation as we are doing. It is worth reminding ourselves that since 1997 the poorest fifth of our citizens have received an income gain of about £2,400 on average. We should be proud of that.

The noble and learned Lord, Lord Howe, supported by the noble Baroness, Lady Noakes, inquired about unmarried couples. He will not need me to remind him that that arrangement has been in place since the additional personal allowance was introduced in 1988 and is therefore not new in the Bill.

The issue about same-sex couples may or may not come up in subsequent legislation or in a proposed Bill that will be introduced by, I believe, the noble Lord, Lord Lester. Tax credits in that regard follow the social security and tax systems, and a same-sex couple is not at the moment recognised as a household.

The noble Baroness went on to make slightly more rebarbative comments—she said that tax credits fiddle—

Earl Russell

My Lords, the Minister said that a same-sex couple is not at the moment recognised as a household. I believe that the judgment of the Appellate Committee in this House in the Fitzpatrick case is to the contrary.

Baroness Hollis of Heigham

My Lords, in social security terms and, so far as I am aware, within the tax system, a single-sex couple is not regarded as a household. For tax purposes, that does not matter because the incomes are obviously disaggregated. However, I assure the noble Earl that for social security purposes, they are not.

I return to the point made by the noble Baroness, Lady Noakes, about tax credits fiddling the figures by scoring as negative income tax. Not alt all: box C2 in the Red Book described the Government's preferred method, which is that the system is now aligned with OECD guidelines and follows best international practice. The Red Book also reports fiscal aggregates for a national accounts basis, as determined by the ONS. We discussed that at our pre-meeting. If there are any particular concerns about accountancy., I should be happy to follow them up in correspondence. I seek the maximum transparency on this.

Lord Higgins

My Lords, what proportion of the total is deducted from taxation and what proportion of the total is simply a straight handout and has nothing to do with taxation?

Baroness Hollis of Heigham

My Lords, the system does not work like that; a sum would not be deducted from tax in that sense for any individual because he would continue to have tax payments. I am trying to find the relevant tables. There is information in the Red Book about the relative gainers and losers under the new system, which may answer the noble Lord's question. I refer to chart 3.3 on gains for families; chart 3.2 may also be relevant. There is further information, but I cannot find the tables. I shall write to the noble Lord—we have printed information about the gainers on tax credits and losers on tax NICs and how they correlate.

Lord Higgins

My Lords, I should be happy if the Minister would write to me about that. I am rather surprised by what she has just said. As I understand it, some tax credits may be paid to someone who is outside the tax system because he is not paying tax. However, so far as others are concerned, I thought that the amount would be deducted from someone's tax bill and that his or her tax would be correspondingly reduced. Is that so?

Baroness Hollis of Heigham

My Lords, I believe that the noble Lord and I are misunderstanding each other. Tax credits are made up of two chunks. The first is the working tax credit, which goes to adults, including adults without children when their incomes are sufficiently low. That is paid through the wage packet. There may be some overlap—I should have to check the statistics—but there will be relatively little overlap because that sum goes to the very low earners. The other chunk involves the much broader band of the children's tax credit, which is paid to the main carer. That is made up of three elements. Leaving aside childcare, they are: the children's element, which provides support for individual children; the second element is the family premium, which was formerly the children's tax allowance; and below that is the child benefit. Those three elements represent the children's block of support. They will be transported from out-of-work benefits to into-work benefits.

The tapers will work in the following way. The taper will come down in relation to children's tax credit; one will start losing it right through up to about —20,000, when one will he on the bottom two strands, which are the family premium–the old children's tax credit of about £500 a year—plus the children's benefit. That will taper out again at about £50,000 to £58,000. In other words, the taper comes down, based on the working tax credit and the children's element. It then flattens between £20,000 and £50,000 and it comes down again in relation to the child benefit allowance. I do not know whether that answers the noble Lord's point.

Lord Higgins

My Lords, I am grateful to the Minister for explaining how simple the system is! Is it not the case that when the tax credit is paid through the payroll—leaving the child credit on one side—the amount of credit will be deducted from the tax bill?

Baroness Hollis of Heigham

My Lords, in a mechanical sense, the individual will get a take-home pay that includes tax and national insurance and this arrangement. In terms of the aggregation for families, there is not a trade-off in the sense of an integrated tax and benefits system because there cannot be. Is that okay?

Lord Higgins

No, my Lords.

Baroness Hollis of Heigham

My Lords, I shall not pursue the matter further.

The noble Lord, Lord Higgins, also asked about the national insurance Bill. The primary rates for national insurance are bedded in primary legislation and therefore need to be altered by primary legislation. There is nothing more to it than that.

On the Bill's objectives, the crucial difference is that, under the working families' tax credit system and under previous legislation, there was a system of benefits that was based on being out of work or in work. We are now slicing that horizontally so that one has work-related support and children's support. That goes back to the explanation that I recently offered. It will help to make work pay and to tackle child poverty.

That brings me to the second range of questions, which were raised by the noble Lords, Lord Saatchi, Lord Freeman, Lord Northbrook, Lord Higgins, and others. Those questions were about means-testing, take-up and how effective the arrangement is likely to be. Noble Lords will recall that the old FIS—family income supplement—had a take-up of about 30 to 40 per cent. When family credit was introduced in 1993, it had a take-up of 50 per cent, which rose to about 72 per cent in terms of case numbers and to 80 to 85 per cent in terms of cash expenditure.

With regard to the working families' tax credit, the statistics of the IFS, which were quoted earlier, were based on the position of the WFTC 10 months after it had been introduced and therefore they had been considerably overtaken by events. At the time that the IFS did its work, it was, indeed, a fact that the figures were 62 per cent in terms of case load and 76 per cent in terms of cash because the people not claiming were those who had least to claim. We now believe that those figures are almost certainly 76 per cent in terms of case load and therefore, well over 80 per cent, or perhaps 85 per cent, in terms of cash.

We also know that, of those eligible but not entitled to family credit, one-third went on to claim WFTC. Half of all lone parents who were entitled to claim family credit but who did not do so did claim WFTC. One-third of those who were entitled to claim but did not do so could name the benefit. I am expecting that under ITC, as the momentum grows, we shall do even better than that primarily because people will be porting their children's tax credit from out of work into work. Therefore, there is an element of automaticity which, over time, should build into a much higher take-up. I cannot give more precise figures than that because, for the first time, we shall be introducing 300,000 or so people who have no children and who will be eligible to claim. We do not yet know how effective that take-up reach will be.

The noble and learned Lord, Lord Howe, suggested that the payments should be carried by other benefits. Perhaps he had in mind, for example, increasing child benefit. I do not know whether he was considering that. If we did so, the money available would allow us to increase child benefit by £20 per child but at the cost of taking almost £20 a week from lower-income families while giving £10 to £20 extra for children in better-off families. Therefore, it would not have the redistributive effects that we wanted to achieve.

With regard to the more general point in relation to tapers and MDRs, as the noble Earl, Lord Russell, said, it is possible for a real conflict to arise. A sharp taper would reduce the number of people caught by targeting. In that case, there would be very high marginal deduction rates because one would be coming off the system very quickly. On the other hand, a slow, low and gentle taper, which is what we have been encouraged to introduce, would bring about a low marginal deduction rate but, as a result, it would go much further up the income scale. There is no way of reconciling those two.

The noble Earl, Lord Russell, raised the question of shared care and asked that we consider the matter. We are considering it, especially in the light of the Chester case and the read-across, if any, from child benefit to issues such as child tax credit. Obviously, it is different when one is dealing with child support because payment goes between partners as opposed to a payment from the state to the individual primary carer. However, I assure the noble Earl that that matter will be kept under review and it is currently under discussion.

The noble Lord, Lord Rix, asked about disability payments. He asked whether, if we were unable to reduce the threshold below £69, we could increase the disregard. I am perfectly willing to look at this matter, but I do not suggest that noble Lords should take comfort from that statement. We have recently reviewed, for example, the therapeutic work rules— the permitted work rules for people on IB—and that may be a better way forward for the constituency for which the noble Lord speaks than going for an increased disregard.

My noble friend Lady Andrews talked about informal childcare and asked whether there was any movement on that front. It is, indeed, the case that lone parents often favour informal rather than formal childcare because they trust it more and find it more convenient. I hope that she will agree that childcare in the home, which the Bill supports, is a useful step forward in meeting the needs of lone parents. Again, we shall keep under review whether we need to do more than that.

The issue of passporting was raised by both my noble friend and the noble Baroness, Lady Byford. The passporting of benefits, including free school meals, will be aligned to a large extent in line with the current benefit structure.

The question was raised of the system being inaccessible and I was asked about IT links with DWP. The Inland Revenue will provide support in a number of ways, including extensive guidance on claim forms being tested for suitability, the telephone help line, and face-to-face support at job centres and Inland Revenue centres. We are having IT links. We want people to have access on-line if they wish. We shall also issue claim forms to existing recipients of children's tax credit, WFTC, DPTC, and so on. Rather than going into an extensive description of how we seek to reach people, if noble Lords would prefer me to do so, I shall be very happy to write a general letter on the subject and circulate it to your Lordships. I hope that, as a result, people will believe that we shall reach those whom we need to help.

The noble Baroness also returned to an issue for which she has fought so gallantly; that is, the question of post offices and methods of payment. It must be said that the primary reason that post offices are not surviving is that they are no longer being used by the communities they seek to serve. I gave the noble Baroness a statistic which I shall now share with the House. I was rather startled to find that last year 50 per cent of the rural post offices that closed had fewer than 70 customers a week. I believe that the line there is, "Use it or lose it".

In future, the methods of payment available to carers who do not receive their benefit through the wage packet will be as follows. The first method will be via a bank. More than 50 per cent of those who claim benefits now have those payments made directly into their bank account. The second method will be via the new direct banks, access to which will be available at post offices. That method is funded jointly by the Government and the banks—I believe that it is what used to be called the "universal bank". The third method will be by card account at post offices. With that system, people gain access with a card number. Therefore, there will be two or three means, including ATMs, by which people can obtain cash from the post office with greater convenience, greater security and less fraud than occurs at present.

Earl Russell

My Lords, can the Minister give me the assurance, for which I asked, that a contingency plan is in place in case the universal bank is not ready in lime?

Baroness Hollis of Heigham

My Lords, not only is there direct access into people' own banks, as is now the case; there is also direct banking and the card account. Clearly, there is no way that ration books will be withdrawn until other appropriate and convenient ways of paying benefits to people are in place. That would be inconceivable. However, we have no reason to think that the universal bank will not be ready in time. I am happy to give the noble Earl that assurance.

Baroness Byford

My Lords, perhaps I may raise a matter to which we shall return. If only 70 people use their local post office, where will those 70 people go if that post office is not there?

Baroness Hollis of Heigham

My Lords, I understand that 80 per cent of all villages where there is a post office have another post office within about one-and-a-half miles.

Noble Lords

Oh!

Baroness Hollis of Heigham

My Lords, that is my understanding. In any event, I believe that post offices will survive ultimately only if they are used by their communities. From my experience of living in rural Norfolk, too often I find that people are happy to use a post office as an occasional convenience but, when it comes to buying goods in order to move revenue from post office payments into the local postmaster's income, they choose instead to go to Sainsbury's. One cannot have it both ways.

A noble Lord

An excellent choice!

Baroness Hollis of Heigham

My Lords, I am sure that the reason they go to Sainsbury's is because of the very high quality of goods that it offers.

I move to the issue of burdens on business. The noble Earl, Lord Russell, asked about discrimination as in cases reported from NACAB. It is an offence to discriminate. We have had very little evidence of it but obviously NACAB has picked up some cases. We shall be happy to take that further in order to safeguard employees. If employers act in such a way, they are committing an offence.

With regard to the matter of burdens on business, I would say only that the new system has been widely welcomed by business. For example, the CBI, support and welcome the attempts made by the government to simplify the rules for tax credits. In particular … [the] abolition of the need for employers to provide a proof of earning certificate … simplification of the notice periods … [and] automatic funding". It also supports, the principle of moving from a fixed 6 month payment of tax credits to a rolling 12-month period". That system has received a welcome from the CBI, the Institute of Payroll and Pensions Management, the IOD, the Association of Convenience Stores and the like. We believe that these reforms will save compliance costs of approximately £11 million which currently fall on employers. Therefore, I hope that the noble Baroness will accept that, while, so far as I can tell, all employers would like to operate in a regulation-free regime, that system has been widely welcomed as an improvement on the existing system.

With regard to childcare checking and fraud, perhaps I may write to noble Lords as I shall be able to do so in detail.

In the time left to me, I believe it is important that I address a point raised by the noble Lords, Lord Saatchi and Lord Freeman. Key draft regulations will be available for the Committee stage of the Bill. I hope that that will be helpful to the House. I accept that it is the case that social security Bills are framework Bills by definition. It would be absurd to have £16.20 enshrined in primary legislation and then to have to come back with primary legislation to turn £16.20 into £16.25. That is why all of this is done by way of regulation. It is equally important that those regulations are scrutinised so that your Lordships can read across from one to the other. I am happy to give that assurance.

In the light of that, we have also had a clean bill of health, as your Lordships will know, from the Delegated Powers and Regulatory Reform Committee. I shall seek to make some negative resolutions affirmative, which I am sure your Lordships will welcome. However, as I said, the Bill has been given a clean bill of health from the affirmative powers committee. I have been pressed on administrative costs. I cannot yet give a precise answer. However, we are working on updating the regulatory impact assessment which will carry the figures required.

Finally, I want to come back to a word, which—I do not want to sound disparaging—apart from the noble Earl, Lord Russell, was used by only my noble friends Lord Haskel and Lady Andrews; that is, poverty. The noble Lord, Lord Higgins, pressed me on whether the Government have, indeed, taken children out of poverty according to their manifesto. I have been trying to find the Households Below Average Income (HBAI) statistics to give him the page references. However, I shall follow this up in writing. If the noble Lord were to look at the after-housing cost figures for children based on the 1996–97 baseline, which is when we came into government, he would find that the latest HBAI statistics show that since 1996–97, 1.4 million children have been lifted out of poverty. It is in the book; read it. That is the key point.

It is certainly true that the relative figures as a median of current income have not been as successful as we had hoped. I am afraid that that is because the Chancellor has managed the economy so successfully. Possibly, had the Chancellor managed it less successfully, we would have been able more effectively to hit the relative child poverty targets because the economy would have shrunk. It is a statement of the growth of income that we have not been able to hit the relative targets. However, as regards the targets compared to the baseline of 1996–97, we have exceeded what we sought to do.

I return to the issue of poverty. As my noble friend Lady Andrews said, we are addressing those who are at the bottom of the income distribution. Currently price-linking the FBU figures, a lone parent with two children under 11 would need an income of £138 per week. The HBAI figures suggest that the latest 60 per cent median figure is £147 per week. Under our tax credits, that figure will indeed be –147. We are hitting those poverty targets with the new reforms. In addition, student nurses and dual-earner couples will all gain. As a result, we are seeing not only a shift of support from those without children to those with children but also a generous shift of support from those who are better off to those who are poorest off, both to support children in poverty and to ensure that entry wages, which are relatively low and worsening relative to median wages, still make attractive the opportunity to work.

If we put that together, we have this Bill. As we explore it in Committee, I hope that your Lordships will become even more aware, as the noble Earl, Lord Russell has found, that its obvious merits will make its support compelling.

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