Schedule 13 - Childcare and childcare vouchers

Finance Bill (except clauses 4, 5, 20, 28, 57 to 77, 86, 111 and 282 to 289, and schedules 1, 3, 11, 12, 21 and 37 to 39) – in a Public Bill Committee at 4:00 pm on 13th May 2004.

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Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 4:00 pm, 13th May 2004

I beg to move amendment No. 91, in

schedule 13, page 328, line 32, after 'under' insert

'Part 1 or 2 of'.

Good afternoon, Mr. McWilliam. I apologise for the fact that the amendment is needed to make a correction to the Bill. Since the Bill was published, we have identified the need to alter a reference in proposed new section 318 to regulations on approved child care in Scotland. The amendment provides a clearer definition and makes a correct cross-reference to the relevant Act in Scotland. It does not change the substance of the Bill. I commend it to the Committee, and apologise that it needs to be made.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

It is clear that the Government amendments merely correct minor errors. We therefore have no objections to them.

Amendment agreed to.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I beg to move amendment No. 92, in

schedule 13, page 331, line 20, leave out from 'an' to second 'the' in line 21 and insert 'organisation accredited under'.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

With this it will be convenient to discuss Government amendments Nos. 93 and 94.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

As before, the amendments correct minor drafting errors that have come to light since the Bill was published. One relates to a reference to regulations on approved child care in Wales, and the other two amend incorrect references to tax credit regulations. They are important for the sake of correctness, completeness and ease of understanding. I repeat my apology, and commend the amendments to the Committee.

Amendment agreed to.

Amendments made: No. 93, in

schedule 13, page 331, line 40, at end insert

(d) by a child care provider approved by an organisation accredited under the Tax Credit (New Category of Child Care Provider) Regulations 1999.'.

No. 94, in

schedule 13, page 332, line 20, leave out from 'an' to 'the' in line 21 and insert 'organisation accredited under'.—[Dawn Primarolo.]

Question proposed, That this schedule, as amended, be the Thirteenth schedule to the Bill.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

I formally welcome you to the Chair, Mr. McWilliam.

The schedule is the result of a review by the Government of the way in which the tax system can affect the provision of employer-assisted child care. According to the Government's original documentation, the aim of the review was to

''widen the current workplace nurseries tax exemption, simplifying the requirements that employers need to meet to qualify for the exemption and offering a better incentive for employers to support a wider range of good quality childcare provision.''

That same document correctly concludes that, therefore, the

''requirement for the employer to have management responsibility of the childcare facility would be removed.''

That is a clear statement of intention by the Government.

Those are worthy aims. Unfortunately I am not clear, nor are most experts, that the schedule will achieve those aims. In particular, the employer's responsibilities for management and funding will be retained, not removed, unless the costs are under the new £50-a-week ceiling.

The Daycare Trust estimates that average child care costs are around £128 per child per week. Most provision for most parents will reach the £50 cap and will not be eligible. In a representation to the Committee, the Chartered Institute of Taxation says of that aspect of the provision:

''This is very disappointing. The new provisions will do nothing to increase workplace nursery provision. Employers can now choose between the existing burdensome workplace nursery rules (which require significant involvement in financing and management) and new rules which are subject to the £50 cap. Neither is attractive.''

That feature of the schedule, the original aims of which were entirely worthy, is a real letdown. I am sure that all Committee members recognise the advantage of good child care provision in the workplace. Given the understandably proud boasts of the Government about the review, many, in particular working families who were trying to make best use of the provision at work, feel let down. I hope that the Paymaster General will confirm the actual amounts of money that are involved. By all accounts, the figures involved are small—at most, according to the Red Book, £20 million in the first full year.

The second disappointment of the schedule is that it does not include the self-employed. Why have they been omitted? I cannot believe that we cannot find some means of assisting working parents who happen to be self-employed, yet there is no provision in the schedule. After IR35, section 660A and the latest turn around in clause 28 for the self-employed, I am sure that the Paymaster General will understand that many self-employed people will feel let down by the omission. Conversations and reviews continue. Is the Revenue preparing separate provisions that would

inform the debate? The Opposition would look favourably on any Government proposals to help self-employed parents, so perhaps she can enlighten us on the issue.

Without such provision for the self-employed—for unincorporated enterprises—the schedule could give firms a further incentive to incorporate. That would run entirely counter to the spirit and the letter of clause 28, which deals with the difficulty into which the Government got themselves over incorporated and unincorporated firms. There is a danger that some small enterprises will look at the provisions and say, ''If we attract working parents into our enterprise and we remain unincorporated, we'll be at a significant disadvantage to incorporated businesses.'' So there is a genuine problem, and I hope that the Paymaster General can respond positively. If the self-employed were considered as part of a wider review, that would send a positive message—incorporation should, as the Government have said, and we have always felt, be for business rather than tax reasons. I hope that she will understand and respond.

Essentially, schedule 13 has two aspects. First, it revises section 318 of the Income Tax (Earnings and Pensions) Act 2003, which deals with the rules and management of company creches. Secondly, it deals with the introduction of the £50 exemption for child care vouchers, under which there would be no tax or national insurance liability.

Earlier, I mentioned the disappointment at the retention of employers' management and funding responsibilities over the £50 limit, but that was clearly not the intention at the beginning of the consultations. The words that I quoted at the start made it clear that the Government wanted to remove those responsibilities, so why the change? That is the question to which I seek an answer.

The change will impose a new administrative burden. Let me briefly enlighten the Committee as to how that will work in practice. We are talking about a weekly limit, so employers will have to track child care provision weekly. If one is in a market sector in which there is a reasonably high turnover of staff and one finds that staffing levels have dropped or increased, one's ability to stick to the limit of £50 per week per parent—it is not per child—could suddenly change, and the danger is that one could go over the threshold. For a couple of months or, indeed, only six weeks in the year, businesses may find that they have exceeded the weekly limit, so tax and national insurance would apply. Of course, the sums involved may be small, but the Government have rightly and continually said that any tax and national insurance liability should be identified by the business. Given that the limit is not annual or quarterly, but weekly, there could be quite an administrative burden.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 4:15 pm, 13th May 2004

I think that the hon. Gentleman is going the wrong way. Businesses do not have to do the tracking; that is the whole point of the voucher going directly to the child care provider. The requirement in the Bill is there, so that businesses do not have to

undertake all that tracking. The £50 is simply passed over. In the consultation, business said that it wanted us to do precisely that to avoid the issues that the hon. Gentleman is outlining, but which do not arise in the Bill.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

I am interested by that because it mirrors the Revenue's advice to businesses at its open day. That view is understandable until one stops and thinks about the implications. The valuation problem to which the Paymaster General has just referred does not remove the compliance burden. Rather, it moves it from the company to the child care provider. If the provider finds that their costs have gone over the £50 limit, tax and national insurance will still be a liability for them, and they will need to ensure that they comply with the law. The employer's compliance burden is simply shifting to the provider. I see the Paymaster General shaking her heard vigorously. I hope that she can set providers' minds at rest because it appears, on first reading the schedule, that, if a provider goes over the £50 threshold, they will have liability, and will be responsible for making sure that they are within the rules. I would appreciate it if she could clarify that. My initial reading of the schedule is that what she has described merely moves the problem from one group of organisations to another—that is, from the employer to the provider.

I hope that the Paymaster General will consider an alternative. I put this forward as a suggestion, not an amendment, because it is a complex, although important, point. Will she consider removing the need for the employer to manage and fund the provision, irrespective of the value placed on it, if the child care is provided by a qualified agency? If a clause were brought forward to that effect, we would certainly be willing to look upon it favourably, because we feel quite strongly that there is a danger of potential liability. Companies will rightly wish to account for that and track it, and that represents a compliance burden.

There is an anomaly in the schedule that must be borne in mind. The measure will bring more financial benefit to higher rate taxpayers than to some low-paid workers. That is because most employees take up child care provision from employers in the form a salary sacrifice or on a salary swap scheme. The best way of illustrating my point is to run through the examples.

A higher rate taxpayer would give up £29.50 in income to get £50 of vouchers. That is obviously after 40 per cent. income tax relief and 1 per cent. on national insurance. The basic rate taxpayer would give up a net £33.50 to get the taxable benefit of £50, but a low-paid worker who gets tax credit—that is obviously an important group—would have to give up the full £50 to get the £50 because of the impact on working tax credit. The danger is that the poorest will get the least. I hope that the Paymaster General will be able to tell us whether that was the Chancellor's original intention.

I have two last detailed and important points. First, the provision of child care can sometimes, although not always, incur VAT. It is unclear from the schedule whether the £50-per-week limit is inclusive of VAT. I

hope that the Paymaster General will clarify that. Secondly, there is the issue of nannies and grannies. When the announcement was made in March, there were proud statements from a number of outside organisations—I am not saying from the Government—to say that nannies would now be eligible. However, having trekked through the Government's statements, I am unclear about whether that is so. Can she clarify whether grandparents and nannies are eligible in the circumstances that we have mentioned? She will be aware of the conditions about people's homes and so on that relate to that. I am sure that the Committee would be appreciative if we could identify whether nannies and grannies are eligible.

The widening of provision for workplace child care is a worthy aim and one that we support in principle. However, it is not quite clear whether elements of the schedule will achieve that in practice. Concerns were expressed by the Chartered Institute of Taxation, which said:

''Overall, we think that the promises of tax reliefs for employer-supported childcare have not been fulfilled and we would be very surprised if, as a result of these new rules, there was any increase in the amount of childcare funded or provided by employers—there may even be a decrease because of the change to the NICs''— the national insurance contributions—


It concluded:

''Dawn Primarolo, in her foreword to the Consultation Document, said that it 'represent(ed) a major step forward in the Government's strategy to increase childcare support.' We fear that it may in fact be a step backwards.''

I hope not, and I am sure that the Paymaster General will want to demonstrate that it is not. It is important that we clarify not necessarily the aims of the legislation but what is set out before us. I hope that the points that I have raised will enable us to do that.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

Good afternoon, Mr. McWilliam. I apologise for stepping over the line, or perhaps not, earlier in proceedings.

The hon. Member for Hertford and Stortford (Mr. Prisk) raised a number of practical concerns expressed by tax practitioners about clause 78 and schedule 13. As he has clearly set those concerns out, there is no need for me to repeat them in detail. The principal concerns are about the extent of the relaxation of employers' responsibilities in respect of the management and funding of workplace nursery schemes. The hon. Gentleman indicated that there is concern about whether the relaxation goes far enough.

Will the Government consider relaxing the regulations further, so that employers do not have to be involved with schemes exceeding the £50 threshold? Is it not possible for the Government to be more generous and flexible, so that employers can involve local providers and schemes without having to micro-manage the issues? I am grateful that the Paymaster General is indicating that she may comment on the matter later.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I was indicating that employers can do that—that is exactly what the measure provides for. When I respond I will explain why that is.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

I am grateful for that clarification and await the forthcoming explanation.

The second practical issue raised by the hon. Member for Hertford and Stortford was about the much publicised suggestion that grannies could be involved in the delivery of child care. As well as causing enthusiasm among people who might have benefited, the idea raised concerns about whether such a scheme would be open to abuse. Our understanding is that under the proposed system a grandparent taking care of children could not be paid by the voucher unless the service is carried out at the grandparent's registered child care home rather than at an employee's home. We understand why the Government have introduced that restriction—one could imagine the scope for avoidance were that not so. However, several practitioners have suggested that the grandparent could be paid by vouchers if they are registered and approved for child care. That might at least provide hoops for the individual to leap through. How have the Government approached that issue? Will there be scope for greater flexibility in the future?

Having joined the hon. Member for Hertford and Stortford in raising those concerns, I shall raise some different issues about the clause and schedule. It would be helpful to understand the thinking behind the Government's proposals and what the precise cost over the next few years will be. He spoke about some of the costs that are set out in the Red Book—£20 million for 2005-06 and £25 million for 2006-07. The Government introduce many reliefs and allowances, but rarely publish the economic justification of the costs and benefits underlying policy changes. One often wonders how much economic analysis underlies the estimates, and what the assessed benefits will be from the expenditure of even a relatively small amount of taxpayers' money.

Were any assessments undertaken of how many additional people may be able to enter employment as a consequence of this assistance with child care? Is it envisaged that the assistance will make employment more accessible for people who otherwise would not enter it, or is it a perk for people with those child care responsibilities, without necessarily having any positive impact on the number of people in employment? In other words, in crude economics speak, will it be a deadweight cost to the Exchequer, or do the Treasury's estimates make any allowance for additional income that might accrue as a consequence of having more people in employment? It would be helpful to know what underlying assumption the Government have made, and whether they believe that their policy will have any impact. My concern is that quite a few of the policies to introduce new allowances and reliefs seem to have been introduced without much evident assessment of whether they will have any economic benefit over time.

Has the Paymaster General undertaken any investigation into the potential scope for legitimate tax avoidance that these proposals would create? She will know that many employers have already considered the possibility of a salary sacrifice being made in exchange for vouchers, in order to reduce tax liabilities. One complaint about that measure is that it relatively modest and moderate, and will not cost much. The Paymaster General might respond that, for many people, it might not be worth bothering with, but one can imagine that in a large company, if there were a strategy of asking employees to give up income to swap for vouchers in order to take advantage of the tax returns—

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

The Paymaster General scoffs at her own policy, but if she does not believe that £50 is a significant tax avoidance, it is unlikely to have much impact on incentivising child care. She seems complacent about the issue, despite the fact that tax avoidance measures are supposed to be central to this Budget. I am already aware of clients approaching tax advisers to ask whether such schemes could be put in place. I alert the Paymaster General, who in so many of our debates on the Bill is telling us that we must close tax avoidance opportunities, to the fact that she may be opening one up here. I should be interested to know what allowance she has made in her costings for that, so that she does not have to come back to the Committee—if she is still dealing with the Finance Bill in three or four years—to tell us that she is closing this loophole, in the same way as the Government have had to come back to us on other issues, such as the film industry tax relief, to tell us, to their great embarrassment, that the measure has ended up costing far more than they were expecting.

If the Paymaster General can deal with the practical concerns that were clearly addressed by the hon. Member for Hertford and Stortford, she may also be able to give some time to my concerns about whether the economics behind the proposal have been thought through, and tell us clearly what the benefits are expected to be.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I believe that the state should make provision for childcare. In the 1970s and 1980s I spent a lot of time—I suspect that the Minister spent even more—fighting for equal pay for work of equal value, and equal pay for men and women, on the basis that people should get paid for the work that they do, not for who they are or for their personal characteristics or circumstances. The momentum of the proposals in schedule 13 is to reinforce a trend that is already happening in certain workplaces such as the NHS, of people being paid additional amounts because they have children, rather than because of the work that they do. That is iniquitous, unfair and unequal, and it goes against what I—and, I strongly suspect, the Minister—struggled for in the 1970s and 1980s. When replying to the debate, I should be grateful if the Paymaster General—to use her sexist title—could explain the momentum behind this schedule.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I congratulate the hon. Members for Hertford and Stortford and for Yeovil (Mr. Laws) for so eloquently putting to the Committee the representations made by the Chartered Institute of Taxation and the Institute of Chartered Accountants. I commend the Inland Revenue website to both hon. Gentlemen, should they have been unable to peruse it, and suggest that they look at the consultation document and the responses to it. There they will see what was said by those organisations and what was recommended to the Government as a result.

Far from the impression given by the hon. Member for Hertford and Stortford—I am sure that it was inadvertent—of there being a swathe of disappointment outside the House about our provisions, the Government have received congratulations on the process. Indeed, I have spoken on the issue at a number of business breakfasts and on Business Link days, and employers have been requesting information on how to proceed.

It might help the Committee if I first touch on the current position and how the schedule will change it. I shall then deal with the points made by both hon. Gentlemen. Throughout the consultation, employers pressed on the Government that although they were keen to see the proposals developed they wanted it done in a way that minimised further administrative requirements and gave employers the opportunity to expand the types of provision that they could make available to their employees.

The clause is modest. The proposals are not a panacea for working parents seeking child care in order to return to part-time or full-time work. They are part of a series of provisions put in place by the Government to expand child care facilities—through child care payments and tax credits, direct investment in nursery education, Sure Start and child trust funds. Time and again, and especially now, with employment being so high and recruitment therefore being so difficult, employers need to plan and develop their businesses to take account of the child care responsibilities of their staff—both to retain staff and to recruit them.

The consultation specifically engaged employers on the basis that, although many provisions are made under the tax system, we wanted to know what else would encourage them to provide more child care support for their staff—balanced, of course, by the cost to the taxpayer, by value for money and by issues such as those raised by my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) of whether salary would be sacrificed or fairness in the work force compromised. I shall come to each of those points now as I answer hon. Members' questions.

Mr. Laws rose—

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

If the hon. Gentleman has another question, he can certainly ask me it now. However, if he is about to repeat what he has asked me, perhaps he might give me a chance to answer it first.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

We understood that the proposal was only part of the Government's child care strategy. Indeed, at £20 million per year, it would be worrying if

it were the entire strategy. Can the Paymaster General clarify how many additional child care places it will create?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

With respect, the hon. Gentleman has obviously forgotten that he has already asked me that question. I was about to answer it. If I fail to answer any questions, I am sure that I shall be informed.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. It is late on a Thursday afternoon. Time is pegging on and whoever's telephone is bleeping like mad had better switch it off now. I should be obliged if members of the Committee could remember the questions that they asked before they ask them again. It might also be useful for them to listen to what is being said; they can always return to their questions.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

Thank you, Mr. McWilliam. You are right. It is late on a Thursday, and we have been in Committee for a long time.

I wish to remind members of the Committee what will be available before the schedule is enacted. Child care vouchers are fully taxable, but exempt from class 1 employers' and employees' national insurance. Vouchers can be used to pay for both informal and formal child care. The provision of a place in a workplace nursery is exempt from both tax and class 1A national insurance, and the provision of child care contracted by the employer and provided to the employee as a benefit in kind is taxable, but exempt from national insurance class 1A.

The changes made under the schedule are modest. The first will introduce a new tax exemption on child care vouchers of up to £50 a week. The employer will give the value of the vouchers to the total maximum of £50 to the child care provider for the employees. There is no need to calculate whether it is near the limit or around the limit. It will be a straight limit of £50, and it will be restricted, in line with other Government policies, to registered and approved child care. That touches on the point about nannies made by the hon. Members for Yeovil and for Hertford and Stortford. It means that any child care provider that is registered and approved by the Government will receive that. The Department for Education and Skills is about to publish regulations for consultation that will extend the areas of recognised child care providers. At present, nannies are not accepted. There is an equivalent in the tax credit legislation. When the new regulations are finally agreed, which will be soon, they will expand the approved area. The area must be approved.

If grandparents are registered as child minders, they are approved carers and, thus, registered under the scheme. If grandparents are not registered and therefore in the informal child care market, they would not be included in the provisions—they must be registered. A clear principle is involved. When the Government are providing taxpayers' money for the care of children, whether through a voucher or by way of a tax credit—direct payments of up to 70 per cent.—

it has to be clear that quality and safety are assured, even if that is, at the minimum, through a registration scheme. Despite the fact that nannies are highly qualified, where they are registered is a rather complicated matter. I hope that the DFES will be able to clarify that.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury 4:45 pm, 13th May 2004

The Paymaster General has helpfully clarified Government policy. Will the regulations allow relatives of the employee who receives the vouchers to care for an individual and carry out child minding responsibilities at the employee's home, having been properly approved and registered to do so.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

It is very difficult to give the hon. Gentleman an absolute answer, because the regulations will have to be consulted on. Ofsted is doing the registration. The issue that he raised will have to be addressed, for a number of reasons. For example, the parent might do shift work, which would make caring for the child in their own home more appropriate; or, if the child has a disability, adaptations might have been made in the home, making such care much more appropriate. At present, no registration cloak covers all such matters.

The issue was not on the political agenda of the previous Government when we were elected in 1997, so we have advanced from zero. We have provided nursery places and child tax credits, and with these provisions we are encouraging the development of child care places, be they in public sector, employer-provided or in the private sector, and whether they be playgroups, out-of-school clubs and so on. All such measures need to be appropriately regulated. The Department for Education and Skills is addressing that issue in its regulations.

The proposals also deal with the cap of class 1 national insurance exemptions on child care vouchers to £50 a week. The provisions limit that cap to formal child care, as we have explored, to match the new exemption. The full tax and national insurance exemption on workplace nursery provisions is being left in place. I shall return to that, because the hon. Member for Hertford and Stortford asked why the consultation started by saying one thing but ended up somewhere else. The proposals extend the exemption to cover any direct provision of formal child care by the employer—I think that that was the point that my hon. Friend the Member for Wolverhampton, South-West made. That would include where an employer contracts directly with a registered or approved child carer, for example, a child minding network—such organisations now exist—a commercial nursery or an after-school club. The extended exemption for employer-contracted child care would, like the vouchers, be limited to £50 a week.

I have tried to explain what we have and what the schedule moves us to. We have tried to ensure that the provision of workplace nurseries, which works well under the current exemptions, is not disturbed, and to widen the scope of the type of child care available, but limit it by cash. I shall return to how many families we

think will benefit, how much it will cost over the five years, how many employers currently provide child care vouchers and to how much we expect that to increase.

Mr. Laws rose—

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

If the hon. Gentleman will bear with me, I will get to those points. I am trying to deal with this in a logical manner.

As I said, £50 is not nearly enough to cover most parents' child care costs. I am not disputing that. The Government are putting in place assistance to parents on the basis that a contribution of £50 is better than nothing at all. We also must consider the cost to the public and whether such assistance can be afforded. As the hon. Member for Hertford and Stortford said, the proposal in the consultation document was to extend the workplace nursery exemption to cover all registered and approved child care but to limit the exemption to £50 a week.

Respondents to the consultation told us that limiting the existing full exemption for employer-run provision to £50 a week would impose difficult valuations of the benefit. In some sense, that is precisely what the hon. Gentleman suggested. We took that on board, and on reflection decided to keep the original full exemption for genuine workplace nurseries and extend it to people who work at a location but who are not necessarily employed by the employer who provides the on-site nursery facility.

Employers have been saying to us that they cannot afford to provide their own workplace nursery, that it just does not make sense. They do not have enough employees who would use such a nursery, but they would like to buy places in the nursery provision of a company just up the road. We will allow them to do that. I am sure that the hon. Gentleman would agree that an exemption to cover other registered and approved child care provision is a good and sensible step forward. Each time, we look at what is already in the system and ask whether we can make it better. In a sense, he is right: we tweaked the exemption because we thought it necessary to do so.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

The Paymaster General is carefully and thoroughly providing answers that will reassure those people who are affected. I sought to present a concern that was raised at the Inland Revenue open day. Although there is a diminished responsibility for employers in the valuation context, given the weekly nature of the cost and the chances of its moving up and down—it is not an annual but a weekly cost—there is a danger that the valuation, or compliance, burden has moved rather than been removed. That is the essence of the concern. I wonder whether she can clarify that point.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

Yes, I did pick up that point from the hon. Gentleman. If he will bear with me, I will get to it. I am trying to group my answers. First, I laid out current policy, then the changes that the clause makes and why. I plan to move on to discuss the £50 figure, then how much higher rate, basic rate and lower rate taxpayers will gain, and then questions such as how

many parents, how many employers and how much money. Finally, I will deal with his points, including his question about weekly assessments.

Let me deal first with why we settled on £50. It was not unreasonable for us to consider the typical level of support being paid to employees, as the voucher system was already in place but only for national insurance. It is not brand new; it is already in the system, but just for tax relief. The typical support at present is £30 to £40 a week. Perhaps hon. Gentlemen think that I have been too generous. In the consultation, some people asked for a lot more—up to £100—but the £50 a week exemption seemed sensible to encourage employers to help their staff with child care and to encourage more employees to accept such help. That is what we are trying to do.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I may be misreading page 333 of the Bill and the provision to insert new section 270A, but it seems that, if a non-resident parent is paying partially to maintain his child—it is usually a he—both parents could receive the £50 voucher, pursuant to line 7 of page 334. Will the Paymaster General clarify that?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

My hon. Friend is correct. Let me explain. This is an exemption in the tax system, so it honours independent taxation. If both parents were in employment and both parents' employers made the voucher available to them on a weekly basis, both would be entitled if they were responsible for care of the child. That is cross-referenced to tax credit regulations—hence my needing to tidy up a few things earlier with Government amendments—and to definitions of ''parent with care'', because that operates well for tax credits, as it did for the working families tax credit.

I was asked how much national insurance employed parents would save with the £50 a week exemption. It is important to remember that it is a voucher that goes to the child care provider, and nowhere else. The situation is simple: it involves the employer and the child care provider. The answer depends on the employee's earnings and the value of the qualifying child care that the employee uses, but let us take a couple of examples. A higher-paid employee, paying income tax at the highest marginal rate, would save up to £20.50 a week on his or her child care costs. That relates to 40 per cent. tax and 1 per cent. national insurance. An employee paying the basic rate may save up to £16.50 a week. That relates to 22 per cent. tax and 11 per cent. national insurance.

I considered providing the relief only for the basic rate, but to be honest that would be too complicated. It would cause a problem for employers and I am seeking to encourage employers to make the provision, not to put more obstacles in their way. Higher rate taxpayers benefit by a greater amount, but of course they are unlikely to have access to tax credits.

We expect the number of employees using child care vouchers for under-fives to grow from the current 30,000 to 90,000. With regard to other forms of child care provision by employers, we expect the number to go from 30,000—the number currently using workplace nurseries—to 85,000. That will include

holiday play schemes and out-of-school clubs as well as nursery play schemes. It is difficult to be precise, and I apologise to hon. Members, but the number of employers currently offering child care vouchers is between 1,200 and 1,500, and we expect that to rise to 5,000 by 2009-10.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury 5:00 pm, 13th May 2004

I apologise for doubting whether the Paymaster General would provide us with those figures. She says that she expects the number of places to rise from 30,000 to 90,000. Does she anticipate that all those additional apparent places will be extra child care places that did not exist before, or does she expect there to be switching from other forms of child care?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I cannot rule out some switching. It would be impossible to give an undertaking. The measure is about seeing a growth in the provisions for child care made by employers—because employers are doing a lot. We do not see it as a substitution. Frankly, if people were to move across from one child care provision to another as a result of the voucher, they would free up the child care place that they have left for someone else.

The hon. Gentleman chided me earlier on, saying that I should ensure that we track the provision. It is cash-limited for a specific purpose. The tax planning industry would even have to surprise me, which takes some doing now, if it could tell us how £50, cash-limited, only for child care, paid direct to the child care provider and then cashed in from the voucher issuer, with a complete audit trail, could fail to be transparent—let us wait and see. I think the hon. Gentleman was trying to have a bit of fun, given what I have had to say before about tax planning.

I turn now to the question of the self-employed. Allowing a tax deduction for the cost of child care for all working parents rather than through a targeted exemption would be expensive and poorly targeted. I will not make any bones about that—the Government just would not do it. We believe that financial help towards child care cost for low to middle-income families should be provided in the tax credits. Self-employed people can receive help with the cost of formal child care through the child care element of the working tax credit.

We believe that the whole point of the arrangements is that employers have an important role to play in helping their staff to balance their work and family lives. The measure provides the incentive to encourage employers to support their employees with child care. The Daycare Trust estimates that only one in 10 large employers currently help their staff with child care. We believe that the measure is targeted at employers, and it is right that it should be. There is help elsewhere for the self-employed and it is impossible to see how we could make a voucher system work in such a way.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

In her last few words, the Paymaster General may just have answered my question. However, I have two concerns. First is the natural

sense of disappointment that the self-employed will feel because they are not included in the measure. I do not know whether she has other schemes through an enhancement of the working tax credit that would enable the self-employed at least to feel that they are getting reasonable support equivalent to that received by the employed. Just as importantly, given the concern that the Government have had about the difference between incorporated and unincorporated enterprise and the nature of the incentive that that might provide for companies to incorporate on a tax basis and not on a business basis, we would be happy to work in a positive manner with her—I know that the Government are looking at the taxation of owner-managed businesses in general, so there is a opportunity there if she is willing to consider how we might help the children of the working self-employed.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I will come to the points about incorporation, because I think that they are a bit daft. I cannot think of any other way to describe the idea that a £50 voucher will drive companies to incorporate. There is a huge range—

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

We are talking about the self-employed, not staffing.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

That is interesting and we will come back to it.

The self-employed are within the tax credit system and very generous support is available to them through the working tax credit because of that. There are many examples demonstrating clearly that the presence of the tax credit, including the payment of child care through the working tax credit, enables the self-employed to start their business in the first place and to develop it. The idea that there is nothing for the self-employed is wrong.

The point was also made, and I hope that I have now disposed of it, that there will be a far greater administrative burden on employers. The Chartered Institute of Taxation might think that, but employers do not. They are saying, ''This is the method that's easiest for us to administer. We want to provide for this but you, the Government, have to give us more help and encouragement with the way that the rules operate.'' We have responded accordingly. It is totally unrealistic to suggest that people would incorporate simply to provide themselves with a child care voucher.

The hon. Gentleman also made the point about applying the exempt limit to a tax week. As the exemption is subject to a financial limit, it is necessary to apply it on a per week basis. That is how the tax system works. It ensures that an employer knows how much of the benefit is exempt for a PAYE period, as they will not have to consider accrued or future exemptions.

The weekly limit will ensure that there is no duplication of the exempt limit when an employee changes employment during the tax year and,

therefore, no subsequent tax underpayment. The weekly limit will allow exact alignment of the national insurance rule, something that the hon. Members for Hertford and Stortford and for Yeovil have impressed on me on several occasions. We should have closer alignment, and that will ensure that the exemption is applied in accordance with the national insurance PAYE period.

The question of the burden on the company of a provider is simply not an issue. The limit is simply the cost to the employer of providing the voucher or child care, and no complex evaluations need to be undertaken.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

The Paymaster General has identified several issues and satisfactorily answered several questions, but will she answer this question to reassure people? If a provider finds that the value of the child care provision that it makes is over that limit in any one week, is there a tax and national insurance liability?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

If there is an increase in the provision, the parents will have to make up the difference. The provider of the child care will determine whether it is within the national insurance levels and how its employment is accounted for. Calculation is on the excess.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

So there is a liability.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

Yes, but the provider already has a liability by virtue of the fact that it is a provider earning, so anything in excess of £50 would be treated in the same way. If an employer had paid the excess, it would come out of the system through the employee's national insurance and tax in the same way as it currently does with the necessary tax, whether it came within the benefit in kind or from the national insurance exemption.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

I just want to clarify for those who are affected that the parents would have a liability and that the Government would expect them to pay if provision were to cost more than £50. Is that what the Paymaster General has just said? How are they to account for it?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

It will be accounted for in the same way as with the current benefit-in-kind legislation. We are discussing people who currently have to account for all of it. Why is it such a huge intellectual challenge to take £50 off it? This is getting a bit daft. Sorry, I should not have used the word ''daft''.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. ''Daft'' is all right, particularly if you have an accent like mine.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

The argument is unrealistic, considering the reality of how accounting currently operates. We are discussing a provision that is already in operation, and we will make it more generous. So why is it such a huge intellectual challenge? I am afraid that the hon. Gentleman has lost me. Child care in an appropriate, registered creche, playgroup or nursery is in the arrangements before us.

The hon. Gentleman asked about VAT. As he is probably aware, creches, playgroups and nurseries are VAT exempt under both UK and European law. That ensures that parents are not charged VAT on the care provided to their children.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I take my right hon. Friend back to the point about intellectual challenge. Perhaps I misunderstand the tax system, but it seems to me that if an employer gives out vouchers for private health care, such that provided by BUPA, it should operate under a similar tax regime as that proposed for child care vouchers. If not, why not?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

The provision of private health care is entirely different in that it does not qualify for tax relief.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. This is not within the scope of the clause.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

Okay, I will not go down that path.

My hon. Friend asked a question about pay advantage for those with children. It does not occur here. This is not a tax relief for a selected group of employees, and it is not an allowance as an expense that does not directly result from employment. It is a ring-fenced exemption for child care benefits in kind meant to encourage employers to engage with the issue of child care and to offer some help to those employees who want it. My hon. Friend is right and his point goes to the heart of the issue.

How do we encourage employers, while ensuring that that encouragement is fair and equitable, as simple as possible and cash-limited in terms of the exposure of the Exchequer? After consultation on the issue, I contend that the clause and the schedule offer the best way forward: cautious but helpful, in broadening the amount of money and the child care facilities available. I commend the schedule to the Committee.

Question put and agreed to.

Schedule 13, as amended, agreed to.

Further consideration adjourned.—[Jim Fitzpatrick.]

Adjourned accordingly at thirteen minutes past Five o'clock till Tuesday 18 May at half-past Nine o'clock.