Work and Families Bill

I thank the noble Baroness, Lady Miller, for introducing the amendment and allowing us to have another discussion on this topic, and I thank other noble Lords who have contributed. The matter of direct payment by HMRC of statutory maternity pay, statutory adoption pay and statutory paternity pay has already received some discussion in the other place. However, we first need to understand why the Government have decided against direct payment generally, as the same considerations will apply for direct payment of additional statutory paternity pay and for an optional direct payment scheme for small employers. The Government have made clear from the outset that we are committed to delivering the work and families legislation in ways that balance the needs of children, families and their employers. Recognising the needs of employers, we committed at the time of PBR 2004 to consider the possibility of direct payment of statutory maternity pay, statutory adoption pay and statutory paternity pay, as one way of easing the administrative burden for employers. After careful consideration, much external consultation—including with an ad hoc consultation panel of payroll experts—and extensive analysis, we concluded that DP was not as attractive as it initially appeared. HMRC’s analysis was published on its website at PBR 2005. I invite noble Lords to access that because it gives a lot of detail. This showed that direct payments would not, in fact, remove from employers all the burdens associated with maternity, and so on, leave and pay. It would not really be viable without major risk of errors on a large scale affecting employees at a particularly vulnerable time and their employers. It would not represent good value for money for the taxpayer—the costs of set-up in particular being disproportionate to the benefit for employers. It would not be timely—HMRC says that it could not deliver direct payment before at least 2010, in view of its other IT commitments. Narrowing direct payment down to an optional scheme or to additional statutory paternity pay only would still not make it viable. However, I invite noble Lords to note that we are taking steps to remove the main payroll problem employers have with statutory maternity pay, and so forth, by another means—a free calculation service delivered much sooner and at much less cost to the taxpayer. It might help noble Lords if I explain in more detail the purpose of the amendment—the employer problems that we are trying to address here. Then I will explain just what direct payment would actually involve because it is not immediately obvious. The main problem that employers have is with their employees’ leave. They have to manage the leave entitlement and the job left vacant by the absent employee. An additional problem is the employees’ statutory pay. Here the main problem is the calculation of the pay due to the employee and recoverable from the state. This is more difficult for employers calculating it manually than for those using software calculators. But actually making the payments is not complex, as an established payment route from employer to employee already exists. Direct payment is also more complex than some might expect. Largely, that is because these statutory payments are wage replacements not state benefits paid gross. That means that they are subject to the whole range of payroll deductions, such as tax, national insurance, pension contributions and payroll giving, and are subject to earnings-based employer contributions, such as employer national insurance contributions, or occupational pension contributions, or the large employer’s 8 per cent contribution to maternity, and so on, pay. At this juncture, I should comment on the 4.5 per cent uplift over re-imbursement for smaller employers and stress that it is not intended to compensate for the administrative costs of operating the scheme. It is meant to compensate for the employer’s national insurance contributions due on SMP that are paid out. It is right that that is taxable, whichever of those features it is intended to cover. So what would direct payment actually involve? First, for statutory pay, it would obviously mean HMRC taking over from the employer the calculation and payment of the statutory payment in question. What is less obvious is that they would also take over the payroll deductions; and the employer would still retain responsibility for earnings-based employer contributions and for periodic returns of the employees’ income, like the employer’s annual return, to HMRC. To accomplish all of that, the employer and HMRC would need to carry out a complex two-way information exchange to high standards of accuracy and tight time limits. The Committee may like to note that the ad hoc consultation group of payroll experts did not believe such an information exchange could take place without error—and error on a large scale—affecting employees at a particularly vulnerable time; and affecting their employers to whom they would turn with their immediate concerns about wrong or late payments. Correcting these errors, which the group of experts believed inevitable, would impact heavily on HMRC. Secondly, for any other earnings of the employee from that employer—late payments for overtime or bonuses as well as any occupational top-ups and occupational maternity pay amongst others—the employer would continue to remain totally responsible. That would mean two parties running two parallel payrolls with two sets of incomes, deductions and contributions—HMRC’s payroll for the statutory pay; the employer’s for the other earnings. The group of experts considered that errors would be inevitable. I will continue to try to throw some light on that. Thirdly, the employer would remain responsible for managing the leave and the vacant job. At this point, the Committee may like to consider the overall effect of direct payment on employers, for clearly it does not take away all the problems with leave and statutory pay. Rather, it removes some pay burdens—calculation, payment and deductions, but the employer retains other pay burdens—the earnings-based employer contributions and periodic returns; running a parallel payroll for other earnings from the employment. The employer also retains their main burden—the leave and the vacant job and the employer acquires two major new burdens—the information exchange and dealing with errors. Even if direct payment does not remove all employer burdens, the Committee may still like to know if it is viable. For this I will remind you of the view of the external group of payroll experts. In their opinion, the information exchange was, of necessity, complex and errors on a large scale would be unavoidable. This would therefore prevent direct payment from being viable without adverse impacts on all concerned—employees, employers and HMRC. Would direct payment be value for money? That question has excited some interest in the other place as well as among noble Lords. I have deliberately spent time explaining how complex direct payment would be, as that has a bearing on the cost to HMRC. One-off set-up costs are estimated at up to £75 million—the major components of which are the new IT system for calculation, payment and deductions and for the information exchange; and the probable costs of a new contact centre to handle the inevitable errors. This would be no ordinary stand-alone payroll software package. It would need links internally to HMRC’s other data systems—for employee identification and other purposes—and externally to employers and sundry recipients of the payroll deductions. This would require a secure two-way electronic connection or gateway, protecting the flow of personal data. In addition to the initial £75 million start-up costs, there would then be annual running costs, estimated at around £50 million, which include maintenance costs for this highly complex IT system. Employers would save time from the removal of calculation, payment and deductions, estimated at around £3 million gross. The extra time costs of the information exchange are estimated at around £2 million, leaving employers about £1million better off in net terms. The net benefit for small employers was estimated at around £400,000. Out of this, employers would still need to meet the costs of sorting out errors; and software users would be likely to face the costs of more complex software to handle the information exchanges. That does not represent good value for money for the taxpayer. Direct payment is much more complicated and cumbersome than people anticipate—and that is reflected in the heavy one-off set-up costs for enormously complex IT and a contact centre. It is technically feasible—nobody would dispute that—but it would not be easy or timely. As we saw before, employers lose few burdens—their savings are in the time spent on calculations, payment and deductions. The Committee might well ask if direct payment would be timely. In view of its other IT commitments, HMRC says that it would not be able to deliver direct payment before at least 2010, as I indicated earlier. I hope that it will be clear now that there are many good reasons why the Government have decided against direct payment—it has been a thorough and proper analysis. As I said earlier, detailed costs are available on the website and I urge noble Lords to look at those. Value for money is only one of the reasons. The Committee might wonder therefore what the Government are planning to do to remove the payroll problems of these statutory payments. We recognise that the main payroll problem is the complex manual calculation. Our response is to eliminate the need for any employer to calculate statutory pay manually—through a combination of easy-to-use electronic calculators provided free by HMRC, and, for those employers less comfortable with such calculators, a free telephone helpline calculation service. The cost of this to HMRC is less than £1m in one-off costs, and the timing is much sooner than direct payment—much is already in place and the rest is planned for April 2006. These measures will remove the main payroll problem of manual calculation for employers. The amendments under consideration suggest, in effect, direct payment of additional statutory paternity pay alone and an optional direct payment scheme for smaller employers. As I have just said, there is now less need for direct payment anyway because manual calculation is being eliminated. This and all the above arguments apply here too. The payroll burdens related to ASPP and other statutory payments would not be removed, nor would the need for a new information exchange and the inevitable errors. It would still not be value for money. In the case of an optional DP scheme HMRC’s one-off costs would not change much—the IT system would need the same capabilities and a new capability to distinguish between larger and smaller employers. On the other hand, any specialist contact centre could be smaller. Annual staff costs could be lower too. However, depending on uptake, optional direct payment would affect fewer employers and their net benefits would be smaller. Treating some employers differently from others would only add confusion to an already complex area. In the case of a scheme solely for ASPP, HMRC’s one-off costs might decrease by around £10 million or so, whereas the benefit would be received by fewer employers and would likely be a fraction of the net £1 million I mentioned. Claims in the first year are estimated at up to 16,000 only, and treating ASPP differently from the other statutory payments would only add confusion to an already complex area. Large employers and many small employers have already made it clear that they do not want direct payment, with its complex information exchange, anyway. I understand the CBI’s position on that, but it does not speak on this matter for the whole of industry by some way. I hope that noble Lords will now fully appreciate why the Government took the view that there would have been little point in proceeding with a direct payment scheme generally, for a wide range of good reasons, including the poor value for money; and why optional direct payment for smaller employers is even less attractive, as is one of additional statutory paternity pay alone, given the small number of employers affected and the reduced net benefits. I therefore respectfully ask the noble Baroness to withdraw her amendment.