Tax Credits Bill

[back to previous text]

Mr. Webb: I was startled by the hon. Gentleman's brevity.

With regard to amendment No. 3, and the issue of whether these tax credits should be regarded as negative tax revenues rather than as social security benefits, it is clear that a part of them offsets a tax liability. Therefore, regardless of whether they are listed as a reduced payment of income tax—on a pay slip, for instance—or as two separate entries, there is a meaningful sense in which they are tax credits, as they reduce someone's net tax liability.

However, some part of the expenditure that is being dealt with in this part of the Bill does not do that. If a family's tax liability is smaller than its combined tax credits entitlement, it is hard to see how the part of its tax credit entitlement that does not merely offset its tax liability but goes below zero—thereby exceeding its tax liability—can be regarded as a negative income tax yield rather than a social security payment.

I want the Minister to inform the Committee, either now or in writing—or in another way—about the breakdown of the total expenditure on tax credit, so that we can draw a comparison between the part that offsets people's income tax liabilities, and the part that takes them beyond zero and, therefore, is really only a social security benefit payment. I have no feel for whether that comparison will reveal a figure such as a quarter, a half—or whatever—and it would be helpful if the Minister could inform us. If most of the tax credit money is offsetting tax liabilities, it makes a certain amount of sense to regard it as negative income tax, but if only a small part of it is doing that, and most of it is taking people well beyond zero, it should be regarded as benefit.

Dawn Primarolo: As the hon. Gentlemen who have spoken to it have said, the amendment seeks to explore the Government's thinking behind the funding for and accounting of the new tax credits.

Unfortunately, the amendment removes the provision for allowing tax credits to be funded from tax receipts, but does not provide for alternative funding. Therefore, it deletes all the credits, which—I am sure the hon. Gentlemen will be unsurprised to hear—I would not welcome. I mention that because it is a probing amendment, and I am sure that it will not be pressed to a Division, but if it were, I would ask my hon. Friends to oppose it.

The key issues are the interaction between the Red Book and national accounts, and transparency.

I am unsure whether I can immediately answer the question that has been asked by the hon. Member for Northavon, but I undertake to investigate the matter,

Column Number: 18

and to write to him. However, in my remarks, I will bear his question in mind, and try to address it.

With regard to the question about the accounting, the Government's position is clear and consistent. The tax credits are part of the tax system and, as such, they are administered by the Inland Revenue. They are designed to balance the contribution that families make through tax and national insurance with their financial needs. That is what the Inland Revenue is doing.

The tax credits provide a way for the tax system to take account of the circumstances and responsibilities of a family or a household during a tax year. Therefore, it is proper that the new tax credits should be funded from tax receipts: the working families tax credit and the disabled person's tax credit were funded in that way, as was the children's tax credit, which is essentially a relief.

Funding tax credits from tax receipts accurately reflects what actually happens. For the Government, the cost of the tax credits interacts directly with the Chancellor's other tax proposals, and it affects the net taxed receipts that are available to fund our programme.

The way in which the employers deal with tax credits precisely follows the treatment provided in clause 2(2). Through PAYE, employers withhold tax and national insurance contributions from their employees' wages. From that pool of money, they pay their employees' tax credits, with the caveat that if the figure that they pay out is larger than that which they receive, they can apply for a direct grant in advance to help them with their cash flow.

Mr. Hoban: The Minister's logic works, although I wholly disagree with it. As an accountant, I advise many clients against netting off, and that is what we are doing under this system. I do not agree with her argument.

Someone who is unemployed may receive the child tax credit, and because he or she qualifies for the jobseeker's allowance, or income support, he or she does not pay any tax. The Minister uses an argument based on the way in which employers administer their payrolls and applies it to the tax benefits paid to someone who is not in work. That would be a benefit, not a tax credit.

Dawn Primarolo: I got the hon. Gentleman's point. My explanation was logical when applied to the working tax credit, but not when applied to the child tax credit, which is paid straight to the carer. It would be nonsense for the child tax credit to be paid differently simply because it did not go through the employer. That would take us away from the principle towards which we are moving. The system makes sense and there are precedents for it. I was interested to hear that the hon. Gentleman was an accountant. I am sure that he is not against the way in which value added tax operates—it nets off. That principle applies within the system.

We have moved away from how DWP treats its expenditure, and how Inland Revenue will account for that expenditure.

Column Number: 19

Mr. Flight: I wish to respond to the point made by my hon. Friend the Member for Fareham, and to get to the heart of the issue. The overlap between those receiving benefits and those paying tax is not a good one. That is why reducing the tax paid is a problem. The Minister will find that the overlap is, at most, 40 per cent. in aggregate. The intellectual argument can be made that 40 per cent. is a refund of tax, but 60 per cent. is not.

Dawn Primarolo: Perhaps I could move on to how the Inland Revenue will account for its expenditure, and how it differs from DWP. That may well assist us in our discussions.

Subsection (5) requires Inland Revenue to set forth accounts for the tax credits and to distinguish between the amounts of each tax credit. That is a more rigorous procedure than that taken in respect of voted ones, as the estimates—they are only estimates—are put forward for the vote by DWP or other Departments. At the end of the year, reconciliation for social security benefits is done on a sample basis to ensure that nothing has gone wrong overall. That does not match Inland Revenue's accounting system, which is necessarily more thorough, given the range of issues that it deals with, as it needs to track payments.

The Government have made it clear that Inland Revenue will account for all tax credit payments in the same way. At the time that a payment is made, the exact tax liability for that year will not be known. That can be determined only at the end of the year. It would not be possible to break down the payments into different parts and fund each part separately. Expenditure must be shown, and that now relates to how much was paid out in the tax credit. The Inland Revenue's care and management responsibilities and the way in which the Department operates make it necessary to identify expenditure on tax credits.

I envisage lots of questions, either now or over the coming months and years, about breakdowns of those figures, and I shall have to pay careful attention to that and be as helpful as possible to hon. Members. However, they will be able to see more clearly what is spent on tax credits, because they will see at the end of the year the actual amounts involved and how they fit into the overall budgets. However, the amount will also be dealt with as negative tax and will be deducted from tax receipts. I believe that that will give better and more transparent access to the exact expenditure on the tax credits. Although the hon. Member for Arundel and South Downs does not necessarily agree with how we account for that in the Red Book, I hope that he will appreciate that it is clearly shown.

The amendment is fundamentally flawed. I know how difficult it is to draft amendments, so I do not criticise the hon. Member for Arundel and South Downs for that, but I ask him to withdraw it on that basis. If he feels unable to do so, I shall have to ask my colleagues to oppose it.

Mr. Flight: We have made our point, and we would not want an amendment to cut off necessary welfare funding. We are, therefore, in principle willing to withdraw the amendment. However, the Minister has not answered the question about part 95 of the

Column Number: 20

European standards of accounting and whether it is legal to account for the money in this way, given that the Minister has confirmed that it will be agreed that the payments constitute welfare benefits.

Dawn Primarolo: I apologise for having left out that point. My understanding is that the proposal is in line, but I shall double-check, and if I have misled the Committee, I shall write to the hon. Gentleman and other Committee members describing exactly the interaction involved. However, my excellent officials inform me that we are correct.

Mr. Flight: I thank the Minister for her comments. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 2 ordered to stand part of the Bill.

Clause 3


Mr. Flight: I beg to move amendment No. 58, in page 2, line 37, after 'Kingdom', insert

    'and/or in the European Union'.

The Chairman: With this it will be convenient to take the following amendments: No. 59, in page 2, line 38, after 'Kingdom', insert

    'and/or in the European Union'.

No. 60, in page 2, line 40, at end insert—

    '(2A) No person shall be entitled to a tax credit who is physically absent from the United Kingdom for more than 4 weeks in any one year.'.

No. 5, in page 3, line 4, at end insert

    'and/or in the European Union'.

Previous Contents Continue

House of Commons home page Parliament home page House of Lords home page search page enquiries ordering index

©Parliamentary copyright 2002
Prepared 15 January 2002