Tax Credits Bill

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Mr. Hoban: The Minister has raised a point that concerned several hon. Members on Second Reading. He says that someone's current year income cannot be known; they have to estimate it. Much concern was expressed on Second Reading that people who are claiming a tax credit will have to estimate their current year income and the likely number of hours that they work in a year. Are fears that people will have to estimate those two factors unfounded?

Mr. Boateng: I do not think that the fears expressed in that regard on Second Reading bear too close an examination. We will come to clause 7 in due course, but the whole point of subsections (4) and (5) is to make it clear that awards will be based on income for a tax year. It is not a question of imposing on claimants a formal requirement to notify changes of income during the course of the year or to determine in advance what their income will be. The requirement is to notify the Revenue at the end of the year of any

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changes that occurred during the year and that make the information supplied inaccurate.

6.45 pm

A change could involve hours, employment or the household, but claimants are not required to estimate during the tax year what their income will be for the whole of that year. At the outset, awards will be based on the previous year's income and, depending on decisions still to be made on how to respond to changes in income, claimants may have their awards adjusted during the year based on an estimate of the current year's income. That will be determined in the light of decisions that have yet to be made.

The concerns that were expressed on Second Reading are not justified. Even if thresholds were set in regulations under clause 7(3)(a) to (d), there would still be no formal requirement to report changes in income to the Revenue during the year. In debates on previous amendments, I said that our aim was to develop a culture in which people asked for reassessment and reported changes if their income had risen. That is sensible because it will reduce the risk of overpayment. Similarly, when people believe that changed circumstances might justify an increase in the amount that they receive, we want them to be in a frame of mind in which they see that as something to help them. We shall actively discourage people from notifying small changes of income during the year to minimise the scope for overpayments.

We do not propose to introduce penalties for submitting an estimate of income during the year that turns out to be incorrect. I do not want to trespass on your patience, Mr. O'Hara, by going into clause 7 in detail, but the corollary is that clause 7(9) gives the Inland Revenue discretion to decide whether to adjust payments during the year to reflect a claimant's estimate of their income. That will provide protection against abuse by claimants who wilfully submit unreasonable estimates to obtain extra tax credit. The threat of penalties may deter claimants more generally from asking for reassessment during the year.

We want to encourage people to change their attitude. We are moving towards an integrated tax and benefits system and that will involve consumer education. It will require close working relationships with benefits advisers, NACAB and others to smooth the transition—the Revenue is geared towards this—but we believe that the gains at the end of the process justify the proposed actions.

Mr. Webb: That was a helpful response, because it cleared up some of my misunderstandings about the way in which the system will work, although I am not sure that it was a reassuring response. In the system that the Minister is describing, changes to circumstances covered by the clause must be notified immediately or within three months, or whatever it turns out to be. Therefore, a change in a relationship or the birth of a child must be notified within three months. Changes in income do not have to be, but there will be a year-end reconciliation, if I understand

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it correctly, although claimants will be at liberty to report such changes. However, the Minister used the phrase ''small changes'', which was the starting point for the amendment, although I accept that it was in the wrong place. He is almost agreeing that there needs to be some concept of small changes for the system to work.

To avoid pursuing the matter for too long, I accept the Minister's point that the amendment is to a clause that deals with changes in personal circumstances and not changes in income, and therefore does not work here. However, his description of year-end reconciliations concerns me a great deal, particularly when we are talking not simply about the few poor but about 6 million child tax credit recipients, many of whom have never made a tax return and who, as far as I can see, will now all have year-end reconciliations. I suspect that we shall return to that on the next clause, but I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 6 ordered to stand part of the Bill.

Clause 7

Income test

Mr. Webb: I beg to move amendment No. 65, in page 5, line 10, leave out from 'means' to end of line 23 and insert

    'current year income or previous year income as prescribed in regulations.'.

This is the nub of the Bill for us in relation to people's entitlements. Clearly, fraud is an important issue and I know that Conservative Members will seek to raise it. We are particularly interested in the way in which the measurement of income will work. I had to read subsection (3) many times and I still do not really understand it.

Mr. Flight: Hear, hear.

Mr. Webb: That is reassuring assent. However, I am concerned about the way in which it appears that it will work in a number of respects.

We are glad that the Minister has had discussions with such groups as the Child Poverty Action Group. Its presumption had been that assessment would be based on the previous year's income. The beauty of that system is that the income is knowable, so the danger of underpayments and overpayments is much diminished. I think that it would be fair to say that members of this client group are not necessarily the greatest record keepers. I do not mean that in a patronising way, but they have not needed to be. Typically, they do not file annual tax returns, and those who do have found the record keeping responsibilities to be a bit more of a stretch. If we require folk on much lower incomes and in much more variable circumstances to do the amount of record keeping that will be necessary to present not only a previous year's income but a plausible estimate of the coming year's income, we shall be asking a great deal. The better model that the amendment seeks is a presumption that the previous year's income would be the norm, and regulations would then prescribe circumstances in which the previous year's income

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might not be used. I shall give the Committee a few examples to show where that presumption might not be appropriate and to stress that we would prefer the previous year's income to be taken as the norm.

Clearly, in income support or JSA cases one would want the circumstances to be updated immediately. A person may have lost his job, so it would not be right to look at last year's income from earnings; they would want to go straight to the current year's income. One would also want notified straight away any big change in the family composition, such as becoming a lone parent or the birth of a first child. If there were big changes in income beyond the threshold, one would want to start looking at the current year's income. In the case of a change in hours that goes across a 16-hour or 30-hour threshold, one might want to go to the new year's income. But beyond those dramatic changes in the family circumstances, it seems a much better route simply to use last year's income, which is knowable and known, for which there is no scope for error and which will be on the P60 anyway. That is the principle behind the amendment, which leaves out subsection (3).

I have one concern about the subsection that I should like the Minister to clarify, as, if left in, it could have an anomalous effect. The provision seems to say that if income has gone up by less than a threshold, we go on using the previous year's income. If it goes up by more than a threshold, we use the previous year's income plus the amount of the increase—not the whole amount. If we use the whole amount, there is huge

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discontinuity. However, the paradox with that approach a year on is that, if nothing has changed, the previous year's income will include not just the income for the year before that plus the bit above the threshold, but the width of the threshold as well.

If that is as clear as mud, I could illustrate it for the Minister with some figures, but a disregard effect seems to be at work in subsection (3). If income has gone up beyond the threshold, the width of the threshold is disregarded in the assessment and only the bit above the threshold is assessed. Will that disregard continue a year on from that or will the system suddenly say, ''Hang on a minute. You've got that income. Now we shall start using it for this part of your income''? That could create a jump, especially if the threshold was big. Again, NACAB suggests that a threshold of £2,000 might be appropriate for changes in the other direction.

If subsection (3) remains in the clause, an anomaly could arise, unless I have misunderstood it. We would prefer a presumption based on the previous year's income and then for circumstances to be prescribed in which the current year's income would be used instead. We believe that that would be a simpler system—although I have not presented it as such—than that contained in subsection (3).

Debate adjourned.—[Mr. Sutcliffe.]

Adjourned accordingly at two minutes to Seven o'clock till Thursday 17 January at half-past Nine o'clock.

The following Members attended the Committee:
O'Hara, Mr. Edward (Chairman)
Boateng, Mr.
Buck, Ms
Casale, Roger
Clappison, Mr.
Cruddas, Jon
Flight, Mr.
Hoban, Mr.
Luff, Mr.
Mole, Mr.
Pond, Mr.
Sheridan, Jim
Southworth, Helen
Sutcliffe, Mr.
Swire, Mr.
Webb, Mr.
Younger-Ross, Richard

 
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