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Rob Marris: I draw the hon. Gentleman's attention to explanatory note 11 on clause 7, which says that there will be a PAYE deduction by the DWP on these lump sums, so it would not be the case that an elderly person—to use his suggestion—will be presented with a tax bill that they could not pay; it will be done by PAYE.
Mr. Hammond: I am not an expert on the PAYE system, although the hon. Gentleman may be, but the fact that tax is subject to PAYE deduction does not exempt the taxpayer from liability to pay an amount if, in error, it is not deducted or if something goes wrong with the PAYE system. I should have thought that the liability attaches primarily to the taxpayer and there is an obligation on the employer to deduct the PAYE amount.
I was going to ask some questions about this provision for PAYE pension deduction under clause 10, because I suspect that the Minister will tell us that this is a narrow class of all lump sum payments. However, we will find out about that in due course.
I also have a question about subsection (4), which the Minister has explained. Anyone who penetrated the identity of P and S on reading the Bill will have concluded correctly that they are married people, or those treated as married for the purposes of the pensions legislation, and P stands to inherit the lump sum following S's death. Can the Minister explain why the logic of allowing the year of assessment by election to be postponed by a year to avoid a spike is not extended to the widow or widower of S following S's death? Why is there not the same provision under subsection (4), allowing an election for postponement by one year?
Mr. Lewis: The hon. Gentleman raises some important issues, to which I shall try to respond one by one. He made comments about the delay; that follows the basis on which the state pension is taxed. For example, the delay could be necessary to determine the amount of the final entitlement.
Mr. Philip Hammond: The Economic Secretary makes my point for me. I am suggesting that it would be more logical, and fairer, if the lump sum were taxable when it was paid. If there were a delay—because the DWP computer had broken down, or
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something like that—the tax charge would arise when the payment was made. The Government propose that the charge should arise on the ''first benefit payment day''. Why?
Mr. Lewis: The reason is that we are anxious that this approach should be consistent with how we currently tax state pensions; any departure from that would lead to undesirable consequences.
The hon. Gentleman also wanted clarification on whether a demand for payment of tax under self-assessment could be made before a lump sum was even paid. The answer is no. The DWP's position is that there would be reason for such a delay only if there were a doubt about the pensioner's contribution records. The DWP might have to make inquiries about entitlement to fairly small elements of the lump sum. In such a situation, apparently, the DWP often makes an initial payment, comprising the amount that is not in dispute. I hope that that helps the hon. Gentleman.
PAYE regulations will be made to enable the DWP to deduct tax through PAYE on the basis of a declaration by the pensioner of the appropriate rate. The tax will be deducted at the same time as the lump sum is paid.
Mr. Philip Hammond: Will the Economic Secretary address the specific situation of the lump sum payment being delayed for any reason? Following on from the point made by the hon. Member for Wolverhampton, South-West, would it be the case that because a PAYE regime was in existence, the taxpayer would not become liable for the tax on entitlement to the lump sum on the ''first benefit payment day'' as the Bill suggests? Are we saying that there would be no liability on the taxpayer and that the matter would be entirely taken care of by the PAYE system that the DWP will operate?
Mr. Lewis: The hon. Gentleman went on to ask about a delay in payment, and raised another point about whether a pensioner would become liable for tax before being able to pay. The response is that the only reason for such a delay would be when there was a doubt about the pensioner's contribution record. The tax would be deducted at the same time as the lump sum was paid. The DWP processes already take account of situations in which such things happen, and the changes proposed in the Bill do not have a material impact on that.
Mr. Philip Hammond: I agree with the Economic Secretary: the tax will be deducted at the moment when the lump sum is paid. We all agree on that; the problem is that the liability will not arise at the moment when the lump sum is paid. For some reason best known to themselves, the draftsmen decided that the liability should arise in
''the year of assessment in which the first benefit payment day falls''.
Therefore, if a person received their first benefit payment—their first pension instalment—on, let us say, 4 April, but received their lump sum payment some two, three or four months later, perhaps for all the good reasons that have been set out, although the PAYE tax may be deducted by the DWP when the payment is made, the liability has arisen in the year of
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assessment in which the first pension payment day falls. Is that not correct?
Mr. Lewis: I shall try again to articulate the way the system works, and if the hon. Gentleman is not satisfied with what I have to say, I will have to write to him to provide further clarification.
The hon. Gentleman keeps on referring to a delay. As I have said, the only reason for such a delay is where there is a doubt as to the pensioner's contribution record. In those circumstances, the DWP might have to make inquiries around entitlement for fairly small elements of the lump sum. It is my understanding that in those circumstances the DWP makes an initial payment comprising the amount that is not in dispute. PAYE regulations will be made to enable the DWP to deduct tax through PAYE on the basis of a declaration by a pensioner as to the appropriate rate at which to deduct tax. The tax will be deducted at the same time that the lump sum is paid. I think that that is a pretty clear response to the hon. Gentleman's point.
Mr. Field: My hon. Friend has set out an obvious practical example, and it would be helpful if the Economic Secretary were to explain what is likely to happen. What will be the procedure? Is it likely that a cheque will be sent out for a lump sum? Will the Department investigate in advance to ensure that the cheque is sent to the right place, particularly if there is a delay of three or four months, as put forward in my hon. Friend's intelligent example? Our concern is that a potentially significant interest payment will be due to a beneficiary if there is a delay between their cheque being sent out, and therefore being out of the Department's hands, and their receiving it and paying it into their bank account.
Mr. Lewis: I shall try to provide a clearer definition of what is meant by a PAYE payment date. That is triggered by the actual payment itself, rather than by when the entitlement occurs. That has been part of the confusion; the actual payment triggers the PAYE payment date, not when the entitlement occurs.
Mr. Philip Hammond: Let us try to resolve this once and for all. I think the problem would be solved, and we would not be having this discussion, if the Bill were to state that the liability arises when the payment is made. That would be consistent with the PAYE legislation. I think that that is contained in section 683 of the Income Tax (Earnings and Pensions) Act 2003, which the Minister is now quoting and which says that the PAYE deduction falls to be made when the payment is made.
I am simply asking the Minister to confirm that there is no circumstance in which a person who has not received their lump sum payment could have a liability for payment of tax which is therefore accruing interest. For example, if a person who is due a lump sum payment has moved and cannot be traced and the Department cannot pay them the cheque because it cannot find them, in the interim period does a liability for tax arise, and is interest therefore accruing on that liability?
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Mr. Lewis: I shall try again. In terms of the situation that the hon. Gentleman has described, in no circumstances would that happen. I have tried to say that throughout the debate; there are no circumstances in which that would happen. I hope that reassures him.
Rob Marris: Perhaps I can, through my hon. Friend the Economic Secretary, reassure the Committee. We are, in a sense, on clause 7, Sir Nicholas.
The hon. Member for Runnymede and Weybridge raised an interesting point. By way of an analogy, I suggest that he is mistaking a position where you have VAT at the nil rate, versus VAT exemption. There is a difference. Per clause 7(1), a charge—indefinite article—arises, but in clause 7(5)(a), for example, it quite recognises that that charge could be nil. Therefore, the concerns that the hon. Gentleman is raising would not hold water.
Mr. Lewis: Perhaps we should draw this to a conclusion. The hon. Member for Runnymede and Weybridge asked me earlier what happens if we cannot find the person concerned. If we cannot find them, there is no tax due. I should have thought that was pretty self-explanatory. If we cannot find the person concerned, how can we actually pay them to then tax them? I give way one last time.
Mr. Philip Hammond: That is precisely the question that we are asking.
Dawn Primarolo: He has told you that six times.
Mr. Hammond: He has not. If the liability to tax arose on payment of the lump sum, I would totally agree with the Economic Secretary. My concern is that it appears, from the face of the Bill, that the applicable year of assessment is the year in which the first benefit payment day falls. So if a benefit payment day occurs in a year of assessment, liability to tax on the lump sum arises at that moment. That is my interpretation.
If the Economic Secretary is able to tell me clearly that that is wrong, and that in no circumstances could a person have a liability to tax on a lump sum until they have received it, we shall be perfectly satisfied. My only remaining question for him would be, why on earth is that not the definition in the Bill—that receipt of the lump sum is the trigger for payment of the tax?
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