Tax Credits Bill

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Mr. Flight: This has been a useful debate. I hope that the Minister will not mind my saying that it illustrates the fact that the Revenue and the Treasury have perhaps not fully made up their minds how best to address such difficult territory. In essence, the Government seem to be striving for a system of negative income tax coding, in the same way as tax coding applies positively to income tax. The system is pretty seamless: it can roll from year to year and, where there is no material change in circumstances, it is relatively easy. Clearly, if people's circumstances materially improve, the risks to which my hon. Friends referred arise, and, as the Minister pointed out, if people's circumstances deteriorate, there is the danger

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that people will not know how to apply in time to improve their tax credits.

The thought goes through my mind that, as the Treasury and the Revenue think further about the issue, they may even conclude that the only reliable way to address those matters is to present what I will call annual negative income tax returns and, as with income tax, permit clawbacks out of tax credits if there have been overpayments. Without such mechanisms, there will be problems.

We have addressed the issue in one way and our Liberal Democrat colleagues have raised it in another. The six-month arrangements for working tax credits have been subject to many of the problems on which the hon. Member for Northavon has commented.

The Bill is a framework. As I said in moving the amendments, it has been introduced almost too soon—before all the thinking has been done. The clause is all about regulations that may be introduced. Therefore, there is still flexibility for the brains of the Inland Revenue to decide exactly how they will deal with the problems. In that context, it is correct to withdraw amendment No. 15. However, we remain concerned that the framework that the Government are seeking to establish will give rise on one hand to a great deal of money not being clawed back where people's circumstances have improved, and on the other to people in need not getting the extra credits as quickly as they might require them. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment proposed, No. 45, in page 3, line 41, leave out 'whole' and insert 'first 6 months'.—[Mr. Webb.]

Question put, That the amendment be made:—

The Committee divided: Ayes 2, Noes 9.

Division No. 3]

AYES
Webb, Steve
Younger-Ross, Richard

NOES
Boateng, Mr. Paul Buck, Ms Karen Casale, Roger Cruddas, Jon Mole, Chris
Pond, Mr. Chris Sheridan, Jim Southworth, Helen Sutcliffe, Mr. Gerry

Question accordingly negatived.

Mr. Flight: I beg to move amendment No. 16, in page 4, line 7, leave out subsection (4).

Many aspects of the amendment relate to matters that we have already discussed in some detail, and I will therefore be as brief as possible. Subsection (4) states:

''An award . . . does not end by virtue of any change''

affecting the rate at which it is paid. In other words, a change in someone's circumstances does not necessarily end the award. That arrangement could create problems over whether there are 12-monthly or six-monthly assessments. It may create unfairness in the de minimis entitlement of claimants and non-

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claimants. A person who still has a tiny entitlement can go on receiving a larger award. A person who has just tipped over the edge and lost that tiny entitlement is supposed to report it and not get anything. People at the margins will feel a sense of unfairness over the positions of each.

Would it not be clearer and fairer for everybody if the system operated on the principle that if there is any change to one's circumstances, the award ends and one is required to re-file information? The arrangement is intended to reduce administration, but it could draw an unfair distinction between the two types of people whom I described. Moreover, it leaves an open door for moneys to go missing, which will be expensive and difficult to recover. That has been a problem with the six-month assessment arrangements for the working families tax credit.

6.15 pm

Mr. Webb: I wanted to say a few words in lieu of the Minister, but his return has denied me that opportunity.

The explanatory notes suggest that the thinking behind subsection (4), which the amendment would delete, is to allow for continuity when people move from one circumstance to another. The example given in the explanatory notes is positive—the birth of a child, which enhances the rate of entitlement. Continuity is a problem in the tax and benefit system. When one entitlement stops and another does not start it causes real problems. The subsection allows an award to continue while a recalculation is made. That is beneficial, and I would not want to remove it from the Bill.

Mr. Boateng: I am grateful to the Member for Northavon for describing the purpose of subsection (4), which is much as he said. It enables the award of tax credits to be adjusted without requiring new claims to be made when a change occurs that affects the maximum amount of tax credit to which claimants are entitled, and without the entitlement stopping altogether.

Amendment No. 16 would prevent awards from having that degree of continuity and flexibility. The ability of the new credits to respond to changes during the period of the award is key to the improvements that we seek in the design of the new system. There is an important balance to be struck. The system must have the ability to reflect changes in entitlement as they occur, delivering additional support when it is warranted and reducing it when it is no longer appropriate.

Annual awards provide a stable framework for families to know clearly on what basis and for what period their award is made. Within that framework, the new credits will be able to react to changes in circumstances—one of which was outlined by the hon. Member for Northavon—and the rate of the tax credit payable can be adjusted when appropriate. It is important that adjustments can be put in place quickly and that the process is simple for claimants to understand. It would be onerous to require claimants to have their awards stop and then to make a new tax credit claim whenever their maximum

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entitlement to a tax credit changed. Subsection (4) establishes flexibility within the tax year without interrupting the claim where entitlement continues but at a different rate.

I understand why the hon. Member for Arundel and South Downs tabled the amendment, but it represents a real disagreement between us on the proper way of approaching the issue. I am not sure that I will be able to square the circle for him or to satisfy him other than in the way that I have sought to do so far. There is not much that I can add to the points that I made in response to earlier amendments. The subsection is important, and to remove it would be damaging and deleterious to the Bill. I therefore urge the Committee to reject the amendment.

Mr. Flight: We are putting down a marker. If we are to have a type of what I call negative income tax PAYE coding to provide continuity—I understand the reasons for that—the Government must think of other ways to monitor it and to get it right. As I have said, negative income tax annual returns may be required to provide the information necessary for keeping up-to-date records.

The amendment represents the other, jagged approach, whereby an award must be reassessed whenever there is a change. Our point is that the continuity system has some significant problems to solve. Nevertheless, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 5 ordered to stand part of the Bill.

Clause 6

Notifications of changes of circumstances

Mr. Flight: I beg to move amendment No. 77, in page 4, line 30, after 'given', insert

'within a period of 28 days'.

The Chairman: With this it will be convenient to take amendment No. 83, in page 4, line 37, at end insert

'being not less than three months'.

Mr. Flight: Clause 6 claims to set out the arrangements for notifying the board of changes in circumstances that affect tax credit entitlement. It is not entirely clear, however, whether the provision of such information will be wholly the job of the individual, or whether there will be any onus on the employer—an issue that I raised on Second Reading. Under the clause as drafted, it appears that the employer may indeed be required to provide such information. The amendment is necessary because the framework remains rather woolly. There is no apparent time limit on the provision of such information. Under our amendment, regulations could require that the board be notified

''within a period of 28 days''

when a claim ends.

The Liberal Democrat amendment, which would require that notice be given within three months, is similar. Doubtless the Government will propose a notice period of their own, with which we may all

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agree. In any event, it is clear that a sensible notice period is needed.

Mr. Webb: I speak in support of amendment No. 83. The time scale for notification of a change of circumstance will be set out in regulations, but if the amendment were accepted, regulations would have to specify a notice period of

''not less than three months''.

It is perhaps worth pointing out my concern—shared, I suspect, by both Opposition parties—that the debate is being conducted in the absence of any draft regulations. I tabled a question, asking that we see such regulations before or during our deliberations; indeed, to see them at any point would be nice. It is tempting to say that regulations are about detail and the Bill is about principle, so we do not need to see them, but the line between detail and principle is slightly fuzzy. If the implications of certain regulations prove particularly extreme, the entire principle that we are debating will be undermined. I register my concern, therefore, about the lack of even draft regulations. Failure to provide draft regulations is not universal. In fact, draft regulations were available to the Committee that debated the previous Tax Credits Bill. I therefore hope that the Minister can offer a time scale in that regard.

Amendment No. 83 would, to a limited extent, circumscribe what the regulations may say, given that we have yet to see them. We are trying not to write the regulations into the Bill, but simply to establish the parameters in which they operate.

One example of a change in circumstance—the ending or starting of a relationship—would be reportable in all cases. The issue has been drawn to our attention by the Low Income Tax Reform Group, which, like the National Association of Citizens Advice Bureaux, has first-hand experience of the client group in question. The group states that, where two people's

''relationship ends in tragic circumstances . . . their first reaction is unlikely to be—Ah! We must inform the Inland Revenue straight away because section 5(3) of the Tax Credits Act''

requires that we do so. It is clear that they must inform the Inland Revenue at some point, but we should bear it in mind that, just because one partner has walked out, it is not certain that the relationship is definitely over. It may not become apparent for some weeks or months that that is final. That is just one example of how the establishment in regulations of a short notice period would be rather unfair on that client group.

Obviously, there is a balance to be struck, and we must also consider administrative convenience and the interests of the taxpayer. A period of three months does indeed strike the right balance—a view that is shared by the Low Income Tax Reform Group. As it modestly says, its representatives are

''those who habitually advise potential tax credit claimants'',

and who are very familiar with the circumstances that we are discussing.

As I have said, we are not trying to write the regulations into the Bill. Instead, the purpose of our

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amendment, given that we have yet to see the regulations, is to establish some parameters.

 

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Prepared 15 January 2002