Tax Credits Bill

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Dawn Primarolo: I shall address the points about the way in which the tax credit system will operate and how, at every point, the Revenue's duty is to ensure that the applications that it receives are correct. I shall not deal with the difference between evasion and avoidance, except to say that I do not believe that the line is as clear as the hon. Member for Arundel and South Downs suggests. Parliament's intent is clear when it says that the upper rate of tax on income is 40 per cent., and those who juggle with that know that intent full well. However, that is not a matter for the Committee and I should return to the amendments, because hon. Members have raised a number of important points.

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I share with Opposition Members the view that the Government must be committed to tackling fraud and non-compliance and I do not dispute that we need an approach that deals with that issue. We are considering the approach that the Government

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believe is most effective, which, as my hon. Friend the Member for Regent's Park and Kensington, North and other members of the Committee have said, must be proportionate. It has become a mantra in the Committee to talk about the need to strike a balance between enforcing obligations effectively and encouraging people to obtain entitlements. The Bill provides a route to balance those two objectives.

Before I deal with the new powers introduced by the Bill and the points raised by hon. Gentlemen, I will point out some of the structural changes that the new tax credit will bring about that will make the delivery system more secure. The first is the measure of income to be used. Income for the tax year, defined much more closely in line with tax, will reduce the scope for understating income and make it easier to cross check income figures with tax records and the information held by the Inland Revenue. Understatement of income is the most common abuse at present when a claim is found to be incorrect. Our experience teaches us that and we know how to deal with it.

The second point is one that exercised the hon. Member for Northavon (Mr. Webb) in particular. It relates to the nature of the new tax credits and their ability to respond to changes as they happen. As he said, support for child care costs needs to be matched more closely to actual costs. At present support for child care depends on the position when the claim is made. Once the child tax credit award has been made, it stays in place for six months. That is an important structural point that we needed to address. The hon. Gentleman also mentioned a matter that has been raised by the National Childminding Association and some private nurseries, which was that parents may register and take a place at the time of application, stay for a few weeks and then, when the payments are securely in place, remove their child from the facility.

Although we have had a great deal of anecdotal evidence of that happening, it emerged from the work that we did on this issue that, first, we needed to make it much clearer to child care providers what they were signing the form to indicate. That required us to give more business advice, which we have done, and much more support, so that child care providers understood what that meant, because many of them thought that they would receive the money direct.

Secondly, when we undertook spot checks to investigate cases, we found not that some children had moved when they should not have done, but that parents had moved their children to other providers whom we would still have recognised and paid for. None the less, there was a problem that niggled away, so we said that entitlement to the child care element would stop immediately the qualifying child care was no longer provided and we would put in place spot checks to ensure that that was done. Again, the information that we are collecting enables us to do that.

When we have constructed the compliance requirements, we cross check at every level to ensure that we are dealing with cases where the fraud is systematic, organised and, in some cases, a criminal activity. When we prosecute, we want to ensure that we are successful with the prosecution, because that is

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the biggest deterrent. The other deterrent is that if people try to defraud the system, are caught and do not get the money, they will realise in the end that it is not as simple as they thought.

As we said in earlier debates, we shall also aim to make direct payments of tax credit straight into bank accounts wherever possible, to reduce the scope for fraud with other methods of payment. Fraud is occurring with giro payments: they do not reach the person they should reach, for whatever reason. Such payments are cashed into the system with different values and, because the order books are issued with several payments in them, the scope for fraud is large. We have also discussed in the Committee the need for sensitivity in dealing with that issue, but secure payment is another means of reducing the opportunities to use the money in ways that were not intended.

What approach does the Bill take to tackle non-compliance? In framing the compliance regime, we have carefully considered the framework, the terms, the levels of penalties and the circumstances in which they would be levied, the approach to fraud and the powers that the Inland Revenue needs. Where necessary, the Bill extends those powers beyond what is currently available. Therefore, the clause introduces a new offence of tax credit fraud and clause 34 extends the Inland Revenue's powers when investigating cases.

The Bill is designed to allow the Revenue to take an integrated approach to its tax and tax credit compliance work, using a co-ordinated set of powers to carry out effective checks and to eradicate errors, negligence—whatever we call it—or fraud on a level that can be dealt with, where the person no longer commits the fraud and is now complying. The hon. Member for Arundel and South Downs touched on that, when he implied that if we allowed too many wheezes to take place, it was a challenge to our citizens to find ways to evade the law. I do not necessarily accept that proposition, but in designing the system we have ensured that such opportunities are as limited as possible. We do not want people who claim the new tax credits to be fearful when they apply that a simple error, or even something that they would not have done but for tragic circumstances in their families, will bring the entire force of the Inland Revenue down on them. The balance that we must strike is between effectiveness and deterrence and dealing with fraud where we find it.

Mr. Clappison: In the light of that comment by the Paymaster General, will she reconsider the provisions that bracket negligence and fraud for the purposes of attracting a civil penalty?

Dawn Primarolo: I shall deal with that issue in a moment.

Mr. Flight: We objected to it.

Dawn Primarolo: The Opposition's approach to the Bill is confusing. They claim that they want a system that is secure and that reduces opportunities for negligent or fraudulent behaviour, but they would cut back the powers on, for example, our ability to deal with such behaviour with employers and to increase the powers against claimants.

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Mr. Clappison: Will the Paymaster General give way?

Dawn Primarolo: The hon. Gentleman must focus on whether he wants me to answer the questions that he has already asked or whether I should leave those to one side and debate with him now; I am happy to do either.

Mr. Clappison: I am waiting with bated breath for answers to my questions.

Dawn Primarolo: There is no need to be unpleasant.

Mr. Clappison: I understand that the Paymaster General wants to make her case and I am listening to it. I assure her that there is nothing in our amendments that would remove or reduce the powers to deal with fraud, whether an employer, a claimant or anyone else commits it.

Dawn Primarolo: Up-front checks into claims will be carried out to combat fraud. The automated system and data sources available to the Inland Revenue will enable it to use systematic risk assessments and screening techniques. Those changes will enable the cases that carry the greatest risk to be identified before payments are made. For fraud to be committed there must be intent and receipt of resources, we can prevent it by ensuring that people receive their fair entitlement. The Inland Revenue will be able to carry out further checks by using the powers provided in clauses 14 or 15 to ask for additional information or supporting evidence from the claimant before deciding whether to turn an award into payment.

The Revenue will carry out up-front checks on all claims. The initial automated risk assessment will identify those applications that present a high risk of non-compliance or fraud and therefore merit immediate consideration. These will be directed for immediate consideration to staff in one of the Revenue's research, intelligence and analysis teams. I am sure that hon. Members do not expect me to tell them and all those who look for wheezes exactly what our risk assessment is and how we will identify such applications. I shall try to give a broad indication, but the assessment becomes useless if it is known. The risk weighting used in the up-front screening process will be capable of being varied either centrally or locally in response to various factors such as changing perceptions of risk, which means that there is a risk assessment of our risk assessment.

The research, intelligence and analysis teams will also have access to third-party information and data from other sources such as self-assessment, and those will be available to assist them in identifying cases. Of course, we have national insurance returns from employers, so we can identify the type of risks to which the hon. Member for Fareham (Mr. Hoban) referred. Only a tiny percentage of employers may be tempted to think that they can make arrangements to depress wages or to operate some other form of wheeze, as it was described.

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Data from all claims will be passed to a database, and will be subject to further profiling to select cases for inquiry. The Revenue will also carry out in-year

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compliance work, which will identify cases where it merely suspects that an award is incorrect, even though it in fact established that such an award was incorrect. In such cases, further investigation might be required, just as apparently suspect claims will be subject to further investigation, as described in clause 14. Clause 16 therefore enables the Revenue to require information and evidence to help it decide whether there are reasonable grounds for amending or revoking an award, thus allowing it to take effective action during the year to prevent tax credits from being paid incorrectly.

Clause 18 will allow the board to carry out inquiries into awards after the end of a year. It will enable the Inland Revenue to implement an effective end of year compliance regime by empowering it to investigate awards and ensure that they are correct, and to amend or revoke them where they are not. The powers build on those already available during the year under clauses 14 and 16. The Revenue will also be empowered to require information and evidence from any person to whom an award has been made, provided that an inquiry has been initiated. The Revenue may obtain information from third parties—for example, banks—in accordance with regulations made under the clauses.

Before I move on to the specific points that were made about fraud, I want to stress that the system in the Revenue and the information that we have enables us to undertake all such work, and to assist in ensuring that the overwhelming majority of claims are correct. There are all manner of reasons for wanting to do that, not the least of which is that we do not want claimants to get to the end of the year and find that, for whatever reason, that they have been overpaid. Indeed, we have discussed that issue before.

Those are not the only powers, however, that will enable the Revenue to investigate fraud. The provisions that will empower the Revenue to tackle criminal fraud are contained in clause 34, and clause 33 creates the new offence. The most serious cases of fraud will be considered for criminal investigation and prosecution by the special compliance office. The cases pursued will be those where the applicant's actions are particularly offensive, including the use of false documents, repeated offending, collusion on the part of employers, or organised fraud by criminal gangs. A case that falls within the criteria, is considered for prosecution but does not proceed for one reason or another—for example, where it cannot meet the requirements for legal prosecution—will return to the compliance teams. The other powers for penalising the claim can then be considered. No case of suspected fraud should escape investigation entirely. That mirrors the approach to tax fraud, where similar considerations apply in deciding cases for prosecution. Interestingly, I do not recall that the hon. Member for Hertsmere had any objections to the provisions on negligence and fraud in last year's Finance Bill.

The Committee heard a great deal this morning about the work that the Revenue can do and how we can move through our prosecutions. I have also said

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that the most serious cases will go forward for prosecution.

I want to deal with the hon. Member for Hertsmere's points about the number of cases and benchmarking.

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