Tax Credits Bill

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Mr. Boateng: I am grateful to the hon. Gentleman for his careful explanation of the amendments. I well understand his concerns. We have rightly debated at length the way in which the new tax credits system is designed to provide continuity of awards, with the capacity to adjust awards to reflect the changing needs of claimants. In particular, we have discussed the way in which the system will work in relation to changes in circumstances during the course of an award, and therefore the flexibility that clause 7 engenders in dealing with responses to income change. One key part of the work to be done on decisions about thresholds under clause 7, which I know is of great interest to the hon. Member for Northavon (Mr. Webb), will concern scope for overpayments of tax credits. To a certain extent, decisions made during the formulation of regulations on thresholds will have some bearing on the outcome of the scenarios that he described. He will understand why I do not intend to go down that road this afternoon.

Amendments Nos. 67 and 68 relate to the circumstances in which the Inland Revenue would be entitled to recover an overpayment of tax credit. By importing wording from social security legislation, they would limit those circumstances to cases in which there has been a failure to disclose a material fact or misrepresentation. In a previous sitting, we had a discussion instigated by the hon. Member for Northavon about the extent to which the provisions

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would reflect elements of both social security and tax legislation. Elements have undoubtedly been taken from both, but the whole is, and is intended to be, very different from that for social security benefits.

The provision that he described made a lot of sense in relation to social security benefits but would not be appropriate for the proposed system. As I said, claimants to new tax credits will have access to guidance and support through a variety of means to help them decide when they should notify the Revenue of a change that might affect their entitlement to tax credits. It is in no one's interest for people to run up debts that they will subsequently find difficult to repay. On the other hand, we do not want to impose obligations across the board for notification of changes when there will be a substantial number of people—for example, those who receive only the family element of child tax credit—for whom major changes would not affect their award. Why should we put them to the bother of notifying a change?

As I have said on numerous occasions, we must strike a balance. We want to minimise the scope for overpayment of tax credit through support offered to claimants and the type of regulations that will be made under earlier clauses. When awards are reconciled at the end of the year, some people will find that they have been paid too much tax credit with no fault on either their part or the Revenue's. In some cases, people may decide to wait until the end of the year before they finalise their entitlement. Provided that they have told the Revenue all that they should have done, that is fine and it is their choice.

It is only right and fair, however, to other recipients of the credit that the Revenue should be able to recover overpayment, just as it would pay out extra tax credits that were due. The same principle applies when the Revenue recovers tax that has been underpaid with no fault on either side. We have all been through that process. Some years we get something; other years we find ourselves paying more. It would not be right to constrain the Revenue as the amendments would.

The hon. Member for Northavon gave an example about hours worked and the annual average. The system would not work in that manner. Entitlement will be based on current non-financial considerations and income will be assessed annually. That is not a question of averaging out in the way that he suggests. People who worked 30 hours a week for the first six months of the year, would receive the 30 hours credit. That would not be clawed back, even if they did not work during the latter six months of the year. We make no attempt to average that out: people receive the credit when it is due. If they stop work or undertake fewer hours, they are not subject to clawback.

Mr. Webb: I am grateful to the Minister. That is a helpful clarification for someone whose life is so clear cut that they work 30 hours a week for six months in a year. For a single childless person, 30 hours is the difference between zero and entitlement, which is a big cliff edge.

What about people whose life is more random? Some weeks they may have an extra shift, or overtime.

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In extreme cases, let us suppose that they do 30 hours one week and then 25 hours the next. What do they do?

Mr. Boateng: Their entitlement will be based on their current financial circumstances. At the end of the year, if the reconciliation is such that some overpayment has been made, the provision will apply. That will be subject to regulations and thresholds. Short of accepting the sort of benefit model that the hon. Gentleman suggests, that cannot be avoided.

Mr. Webb: I am glad that the amendment deals with the problem that I raised.

Mr. Boateng: That is not always the case.

Mr. Webb: The Minister said something that confused me. He mentioned the end-year reconciliation and referred to thresholds. However, thresholds concern variations in income, not absolute entitlement. The Minister seems to be saying that at the end of the year, people may find that the Revenue identifies weeks in which they were not entitled.

Mr. Flight: The hon. Gentleman is hitting on the central problem of the lack of definition of what ''hours worked'' means. If it is defined as average hours per week during the tax year, the meaning is clear. For someone working 25, 30, 35 and then down to 25 hours a week, that averages out or it does not. As the Institute for Fiscal Studies pointed out, a major weakness of the Bill is the lack of clarity about that definition.

Mr. Webb: I suppose that it has been decided that the amount will not be averaged and that there will be some notion of what ''current'' means. Until we see the regulations, we will not know what the definitions are.

I am worried about the mixed messages from the Government on how often they want people to contact the Inland Revenue. The Minister said that the Revenue does not want to hear from those on higher incomes who receive only the children's tax credit. Wild fluctuations in their incomes will not make a difference to their entitlement. However, people whose hours are fluctuating will have to be on the blower every week. The entitlement of people who do a shift one week but not the next depends on their current circumstances. Under the current circumstances eligibility rules, if those people do not want to fall foul of the overpayment provisions at the end of the year and face a possible £1,000 repayment, they must report all those changes all the time. There is tension here. In the case of income-based assessment, someone can assess their income by performing an end-year reconciliation by comparing their forecast with what happened.

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Claimants have to understand that if they are in the higher income band, changes to their income do not matter, but changes to their circumstances—marital status, hours and the rest of it—do matter. If they are in the lower income band, they should immediately report all changes so that a reassessment can be undertaken. I worry about how that will work. Employers are employing people whose hours will

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vary, because that is the nature of their work. The board will require those employees to pay a tax credit one week but not the next if they do not satisfy the qualifying hours.

We have come a long way from annual assessment. This is a muddle that has nothing to do with the claimant, but with the uneasy marriage of current circumstance-based assessment and annual income-based assessment. They do not fit well together and we should revisit the issue. There will be problems even when the scheme is up and running. We are worried that people will receive money that is demanded back at the end of the year, because they did not report every shift. Such people will end up being penalised, possibly substantially.

The wording of the amendment and the attempt to mirror social security legislation may not be exactly what is required, but I have grave concerns about people who run up overpayments. The Minister has not greatly reassured the Committee so far that those people will be looked after properly, given the onus that is being placed on them to understand the different reporting rules.

Mr. Boateng: As I said, I well understand the hon. Gentleman's concerns. We share a determination and an interest in ensuring that people do not find themselves moving in and out of entitlement. He described the Government's approach as an ''uneasy marriage''. That is not fair, but I do not underestimate the technical challenge of the route that we have taken, which is designed to avoid the possibility of people moving in and out of entitlement and to give people income when they need it to tackle poverty and to encourage them to advance themselves through work.

We seek to meet those objectives in a flexible and understandable way. That is technically challenging, and that is why we are engaged in detailed discussions with those with an interest in this area to ensure that we get it right technically, so that people can get advice when they need it about how best to safeguard their interests. The outcome of those discussions has not yet been finalised in regulations. We are considering the hours that people usually work and not a 12-month average.

That is the best way of meeting our shared objectives. We do not want to impose on people across-the-board obligations that attract penalties. We want to ensure that people get in touch when they need to and to avoid the hazard that the hon. Member for Northavon illustrated. We are working closely with the stakeholders who have the greatest interest in this and we believe that the regulations will demonstrate that we have achieved that objective.

We hear what the hon. Gentleman says. We are working on it. The regulations will reflect that. I do not believe that the Bill is any the weaker. On the contrary, it is stronger because we are discussing it and are engaged in careful reflection and negotiation with those most intimately concerned about how to overcome those technical challenges. I hope that with that assurance the hon. Gentleman will not push the

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amendment to a vote. We understand what he is getting at, but we do not believe that the answer is to return to the social security model. We recognise that there is a problem and we are trying to resolve it.

 
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