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5.30 pm

It is also important, as in amendment No. 3 and amendment (a), to stress that the Government should be held to account by Parliament for the extent of fraud in the system and made to say, without giving the game away to the fraudsters, what measures they are taking to ensure that fraud is reduced. We must send out a clear message to the fraudsters, and I am afraid that the Government's track record, with so few prosecutions following so many false claims, sends out quite the wrong message.

The Financial Secretary to the Treasury (Mr. Paul Boateng): This worthwhile and thoughtful debate has demonstrated the seriousness with which the whole House takes the issue of fraud. I assure the hon. Member for Arundel and South Downs (Mr. Flight) that the Government are determined to tackle it wherever and in whatever aspect of the tax and/or benefit system it appears.

I entirely reject the accusation—it was not only implicit but explicit in some contributions today—that we are not committed to tackling non-compliance in the tax credit system: we are, and I would argue that the measures in the Bill demonstrate that. The notion that the people who are responsible for administering the tax and tax credits system would glean from what some hon. Members have said today is that the House questions their seriousness of intent, which would be disappointing for a body of men and women engaged in a difficult and problematic field of enforcement.

My right hon. Friend the Member for Birkenhead (Mr. Field) clearly appreciates the balance that must be struck, whereby we need to be committed not only to deterring, detecting and reversing non-compliance but to encouraging people to take up what is rightfully theirs.

My right hon. Friend has championed that cause for many years, which distinguishes his criticisms and concerns from those of the hon. Member for Bury St. Edmunds (Mr. Ruffley), who, in an interesting reference to the right hon. Member for Kensington and Chelsea (Mr. Portillo), demonstrated that the distance between Kensington and Chelsea and Bury St. Edmunds is more than geographical.

Mr. Ruffley: Will the right hon. Gentleman give way?

Mr. Boateng: No, I have not finished.

The attempts by the right hon. Member for Kensington and Chelsea and his hon. Friend the Member for Buckingham (Mr. Bercow) to change the face of the Conservative party are likely to take a long time. I heard the points that the hon. Member for Bury St. Edmunds made, and I will deal with them later.

Mr. Ruffley: On a point of information, I must tell the Minister that my reference to my right hon. Friend the Member for Kensington and Chelsea (Mr. Portillo) was supportive; I agree with his injunction that our party should be more inclusive. The Minister entirely misunderstood the point I was trying to make.

Mr. Boateng: If what the hon. Gentleman said earlier was supposed to be supportive, I hope that I never have to rely on his support.

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A delicate balance has to be struck. If the hon. Gentleman is being supportive, I hope that he will have the grace to recognise that we need to get the balance right. There is a balance between helping the compliant majority to claim and to understand both what they are entitled to and their obligations under the system—because with rights come responsibilities—and having effective remedies against those who try to abuse the system.

There undoubtedly are people who abuse the system—we all come across them from time to time in our constituency surgeries. My right hon. Friend the Member for Birkenhead and I share a common approach to theology, and we both accept that man is fallen—so, as he suggested, we will not have the opportunity to observe what would happen if the measure were enforced in the Garden of Eden. We operate in an entirely different place, and our laws must reflect the nature of that place.

Mr. Frank Field: Given the nature of the Bill, how it operates, and who is responsible for membership, will not the overwhelming majority of the fallen creatures be employers?

Mr. Boateng: I am not sure that I accept that. There are a lot of fallen folk about, and I do not think that they are to be found in any one place or category. Even among ourselves I fear that there are some—on both sides of the House. We have to live with that fact, but our laws also have to reflect not only the reality of human nature but our need to get the balance right.

We had the opportunity to examine this issue at length in Committee, and I am rather surprised by some of the suggestions that have been made about the Bill. For example, I should have thought that the hon. Member for Hertsmere (Mr. Clappison) would welcome the fact that we recognise the merits of his amendment and the points that he made so ably in Committee. However, he seemed a little churlish—

Mr. Flight: Surely not.

Mr. Boateng: I fear so, although it was uncharacteristic. It was churlish of the hon. Gentleman to chide us for tabling our amendment. We recognised the force of his case, and I find it rather surprising that he suggests that simply because we tabled our own amendment, there may be other hidden horrors lurking in the Bill, as yet unrecognised because there has not been enough time for consideration. I would say that we gave the Bill very thorough consideration in Committee, just as we have done tonight.

Be that as it may, I would argue that aspects of the new tax credits make the system intrinsically more secure. The measure of income used is the income for a tax year, which is defined much more closely in line with tax, reducing the capacity for understating income and making it easier to cross-check income figures with tax and national insurance records. As right hon. and hon. Members know, understatement of income is a common feature of the system at the moment. It will be much harder to get away with that once the Bill completes its passage through this House and the other place.

I assure all who have contributed to the debate that our intention is that the administration of the system and the ethos that we create will develop a culture not only of

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maximum take-up of the system and the credit—the importance of that was put forcefully in Committee by the Liberal Democrats and my hon. Friends—but, importantly, of compliance and of intolerance of abuse. There must be a determined effort to bring to book those responsible for abuse. The regulations, and the guidance given to those seeking the credit and to those administering it, will buttress that culture.

Secondly, concern has been expressed about the child care tax credit. The ability of the new tax credits to respond to changes as they happen will mean that support for child care costs through the child care element of the working tax credit will be matched much more closely to the actual costs incurred. At the moment, support for child care depends on the situation when the claim is made; once awarded, child care tax credit stays in place for the full six months, but we are awarding that structural point. Entitlement to the child care element will stop if the use of qualifying child care stops. Of course, the corollary is that parents who are already claiming working tax credit, and who become eligible for help with child care costs, will be able to apply for it at that point.

The important point, which addresses directly the comments of the hon. Member for East Devon (Mr. Swire), is that we intend that there should be a system of rigorous spot-checks. Officials will visit nurseries to ensure compliance, so the system will not be lax or in any way tolerant of abuse. There will be checks, and we will try to improve links between the different Inland Revenue systems, which will make it harder for claimants to hide sources of income and to receive tax credits to which they are not entitled.

To combat fraud, up-front checks will be made, and the automated systems and data sources available to the Inland Revenue will be used to support systematic risk-screening techniques. My right hon. Friend the Member for Birkenhead made a very fair point—we have not always done as well as we should.

I regret any failures to answer letters and queries promptly. Right hon. and hon. Members may not like the responses that they receive, but as Members of Parliament they are entitled to speedy responses and every effort is being made to improve performance in that area.

5.45 pm

Those checks will enable those cases that carry the greatest risk to be identified before payments are made. The Inland Revenue will then be able to carry out further checks and ask for additional information or supporting evidence from the claimant before deciding whether to put an award into payment.

The Revenue will carry out up-front checks on all claims. The initial automated risk assessment will identify claims that present a high risk of non-compliance or fraud and need immediate investigation. Those will be directed for consideration to staff in one of the Revenue's research, intelligence and analysis teams. The risk weightings used in the up-front screening process will be capable of being varied, either centrally or locally, in response to different factors such as changing perceptions of risk. I think that my right hon. Friend will accept that that is a very different attitude and approach from the one that has sometimes existed elsewhere. The research, intelligence

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and analysis teams will also have access to third-party information and data from other sources, such as the self-assessment system, to assist them in identifying cases.

During the year, the Revenue will carry out compliance work on cases where it suspects that an award is incorrect. Clause 16 enables the Revenue to require information and evidence to help it decide whether there are grounds for amending or revoking an award, allowing it to take effective action during the year to prevent tax credits being paid incorrectly.

Clause 18 allows the board to conduct inquiries into awards after the end of the year, enabling it to implement an end-of-year compliance regime—investigating awards, ensuring that they were correct and either amending or revoking them if they were not. The clause gives the Revenue the power to require information and evidence from any person to whom an award has been made, provided an inquiry has been opened. The Revenue may also obtain information from third parties.

In response to the hon. Member for Hertsmere, I should point out that there were more than 16,000 allegations to the hotline, but, as he will know, there were more than 50,000 investigations into working families tax credit applications. Up to November 2001, there were 50,382 investigations into WFTC applications and 1,668 into disabled person's tax credit applications. I suggest that that is not indicative of any slackness. The hon. Gentleman will want to know that we will be guided and informed by the outcome of the study to which he referred as we implement this tax credit system, and I can assure him that we will be.

On the most serious cases of suspected tax credit fraud, the provisions giving the Revenue powers to investigate fraud cases effectively are in clause 34. Clause 33, which amendment No. 3 would amend, creates a new offence of tax credit fraud. Such cases will be those where the actions of claimants are particularly offensive—the use of false documents, repeat offences, collusive employers or organised fraud by criminal gangs. Those cases will be considered for prosecution, but where they do not proceed for one reason or another, they will go back to the compliance teams at local level to be investigated and penalised. There is no question of people just getting away with it. It is not a case of, if they are not prosecuted, there is no follow-up. There will be follow-up. A clear message will be sent that fraud is simply not acceptable. That approach mirrors that for tax fraud, where similar considerations apply in deciding which cases should be subject to prosecution.

We on the Labour Benches cannot accept the notion that people who are being investigated for tax fraud, many of whom will be white collar workers or self-employed, should be treated differently from those who are being investigated for tax credit fraud, that tax credits are outside the overall tax system and that one particular group of people in society should be treated more harshly and more aggressively when it comes to prosecution than another. All people must be treated fairly. All people must understand that they have rights and responsibilities.

New clause 6 seeks to introduce the offence of aggravated fraud where the sum of tax credit at stake is particularly high or where a person has been convicted of social security or tax credit fraud in the recent past, opening the way to a higher maximum sentence on indictment.

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Courts already have the power to take previous offences and the size of any fraud into account when setting sentence. We know that it is unusual for any court to pass a sentence for tax or tax credit fraud in excess of seven years, however aggravating the circumstances. Dealing with the mischief is not made more effective simply by ratcheting up the maximum sentence. That is an odd way in which to approach sentencing.

There is, however, the common law offence of cheating the public revenue: that can and will be used in appropriate circumstances. It allows the court to pass whatever period of imprisonment it feels is appropriate—there is no maximum sentence. I hope that, having considered that, hon. Members will not feel the need to proceed down the road that new clause 6 suggests. There are sufficient avenues available, and they will be used where appropriate. New clause 6 simply is not necessary.

Amendment No. 3 takes us into different territory. It seeks to impose a requirement on the Secretary of State for an annual report to Parliament on the extent of tax credit fraud and the counter-measures taken. I am not sure what it would add. The Inland Revenue already produces an annual report every year, which is presented to Parliament by Treasury Ministers. It covers, among other things, the Revenue's work on countering fraud and non-compliance across the range of its responsibilities. Since the Revenue took over responsibility for tax credits, the report has included its work on countering tax credits fraud and non-compliance. We are seeking to take a co-ordinated approach to tackling non-compliance in tax and tax credits.

The Revenue is subject to scrutiny by the National Audit Office and its board appears before the Public Accounts Committee. Treasury Ministers are, and will remain, answerable to Parliament on tax credit matters in the normal way.

I assure right hon. and hon. Members that their points about the importance of a vigorous and determined culture in relation to tax credit fraud will be taken on board. We will seek not only in debates in the House but in any other appropriate way to ensure that the House is kept informed of developments in that area.

I shall say a few words about the benchmarking study that was conducted on WFTC cases, which I know is of concern to right hon. and hon. Members. That work was undertaken as a means of evaluating the effectiveness of Revenue systems and, in particular, to inform the development of the risk assessment process. My hon. Friend the Paymaster General has made it clear that we do not think that it would be helpful to provide details of the factors that the Revenue would consider when deciding whether to take up a case. My hon. Friend has said that she needs time to consider the results of the Revenue's analysis and will consider whether it is appropriate to make any of that information available. She has heard the points that right hon. and hon. Members have made forcefully and effectively, and no doubt in due course will communicate her intentions in that regard.

This has been an important debate. We need to make sure that we send a clear message that fraud is unacceptable, that rights bring with them responsibilities and that we intend to ensure that we create a culture of compliance and determined enforcement of the tax credit system, while never forgetting that the system is designed to ensure that those who need help receive help when they

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need it. It is designed to ensure that we address the evils of poverty, particularly child poverty, and make work pay. In doing that, we need to be aware of the importance of combating fraud.

I hope that I have demonstrated to the House our seriousness of purpose and intent and that hon. Members will not push the amendments to a vote.

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