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Tax Credits Bill

8.30 p.m.

House again in Committee.

Lord Higgins: The House is once again in Committee on the Bill. It seems to me that the expression "once again" sounds as if we have been going for a long time.

Lord McIntosh of Haringey: We were just congratulating ourselves on our amiable progress.

Lord Higgins: Whether or not it is progress is debatable; and whether or not it is amiable depends on whether we win the battle! However, be that as it may, with great respect to the noble Lord and the noble Baroness, I must admit that they have been extremely helpful on this Bill. Our anxiety overall is to--

Lord McIntosh of Haringey: Perhaps I may return to our previous discussions and say:

Lord Higgins: I started off this whole series of debates with extracts from Lewis Carroll, but they seemed to go down badly. I am tempted to reminisce, but I shall not do so. I shall leave the matter there.

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Clause 9 [Penalties for fraud etc. and failures to comply]:

Lord Higgins moved Amendment No. 48:

Page 5, line 3, leave out ("the amount") and insert ("30 per cent")

The noble Lord said: I should stress at the outset that Amendment No. 48 is a probing amendment. It is not surprising to note that noble Lords on all sides of the Committee are against fraud in all its shapes and forms. Nevertheless, if one refers to the particular part of the Bill involved here, it will be seen that subsection (1) states:

    "Where a person fraudulently or negligently makes any incorrect statement or declaration ... he shall be liable to a penalty not exceeding the amount of the difference specified in subsection (2) below". In simple terms, I believe I am right in saying that "the difference" is that between the amount that the person was actually entitled to and the amount which he wrongly claimed. Although I may be mistaken, I believe that that means the whole difference between the two. My amendment seeks to make it 30 per cent of that difference.

When one is dealing with people who are obviously, by definition, on low incomes, there is a very real prospect that one will impose yet further penalties on them. Some of the representations which have been made by the Low Pay Unit, and so on, suggest that, as the effect of the Bill is to try to guarantee something like an income of £10,000 a year, if someone were to make a fraudulent claim for that amount he would be liable to a fine of, say, £3,000. Indeed, even on a basis of £10 per week, it would not seem likely that such a person would be able to repay the amount; indeed, he may be consigned for many years to living with far below the income which the Government feel should be the minimum. However, I do not in any way condone any such fraudulent or negligent claims.

There are other matters relating to the penalties, and so on, to which we can return in a short while. However, despite the fact that the offence itself is very serious, I should like to ask the Government whether they consider that what seems to be a very harsh penalty in some respects is a practicable sort of limit which might reasonably be imposed on people who perhaps negligently, rather than fraudulently, make such a claim. I beg to move.

Lord McIntosh of Haringey: The key to this issue lies in the last few words of the noble Lord; namely, "negligently" or "fraudulently". What the noble Lord is trying to do in subsequent amendments to Clause 9, and not so much in this one, is to make a distinction between the words "negligent" and "fraudulent". There is a distinction but to separate such words absolutely could be very dangerous and might lead to "sub-optimising", if I may put it that way, and producing paradoxically damaging results.

This amendment seeks to change the penalty imposed for making a fraudulent or negligent claim to a tax credit. The clause currently provides that the penalty shall be an amount up to the full amount falsely claimed. I should make it clear that that is in addition to the

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payment of the amount itself, which has been falsely claimed; in other words, the person has to pay back the amount falsely claimed before paying the penalty.

Within that maximum the appropriate level of penalty would be set by the Inland Revenue in accordance with published guidelines, to reflect the seriousness of the false claim and the co-operation given by the applicant to the Revenue's inquiries. The level of penalty can be changed on appeal to an independent tribunal. This provision reflects the penalties that have applied for many years to the submission of false tax returns.

A robust regime to counter fraud is needed for two reasons. Family credit has been vulnerable to fraud in the past; working families' tax credit will be based on broadly similar rules, but it will be more generous than family credit and will be available to a wider variety of applicants. Instead, however, this amendment proposes that the penalty should be a maximum of 30 per cent of the amount falsely claimed. This echoes the level of financial penalty chargeable in the benefit system, but the circumstances are rather different. The benefits penalty is fixed at 30 per cent.

This Bill seeks to introduce a more flexible system of civil penalties which can apply across the whole range of offences. The new tax credits are now part of the tax system and, as such, we feel that the penalty regime should as far as possible mirror that for the rest of the tax system. As for many other parts of the tax system, the Revenue will be issuing a code of practice which will make it clear how the Revenue intends to carry out any inquiries and what the rights and responsibilities of applicants are.

Given the fact that the Select Committee on Social Security and many noble Lords opposite have expressed concerns about fraud--indeed, some Members opposite have expressed much more than concern about fraud--I should have expected them to support this provision. The amendment would clearly dilute the deterrence factor in the penalty provision; indeed, there is much less to lose from "trying it on". This is not the kind of signal that we want to send out about the new tax credits system. Therefore, I must ask the noble Lord not to press the amendment.

Lord Higgins: Perhaps I may delay Members of the Committee for just a little longer. It may have been a slip of the tongue, but I believe that the Minister said that before paying back the amount which had been fraudulently claimed, there was a penalty on top of that amount. I presume, although I may be wrong, that it would be simultaneous; that is to say, the person concerned would be required both to pay back that which he had received, which he ought not to have had, plus a penalty on top. With respect, I do not believe that that is what the noble Lord said.

Lord McIntosh of Haringey: I am sorry that I was not clear. The noble Lord is right. The penalties are in

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addition to the recovery of any amounts falsely claimed which have already been paid out. Mere recovery would provide no deterrent at all.

Lord Higgins: I fully understand that full recovery would provide no deterrent at all. That would be too much of a good thing from the fraudster's point of view. At any given moment, the individual concerned is presumably liable for the two amounts. The question is to what extent in practice it would be possible for the person concerned to pay back the amount within any reasonable time-scale. I believe that I am right in saying that in some other cases it is about £10 per week or something of that kind, from an individual who is likely to be pretty low in resources.

The other point which the noble Lord made is the extent to which we are changing the positions of the Benefits Agency and the Inland Revenue. If I understand him correctly, the Government are saying that quite apart from changing the department responsible, they are also taking the opportunity, if I can put it that way, to tighten the penalties. I am not saying in any sense that we should condone fraud. However, we need to be clear whether the effect of transferring the matter from one department to another is to increase the penalties at any given time. Perhaps the noble Lord can confirm that that is what they are doing.

Lord McIntosh of Haringey: The effect is to increase the possible penalties. I believe that that is the right answer. The clause refers to negligence and/or fraud. The difficulty that one always has is distinguishing between those two aspects. What might appear to be negligence in one case could easily be fraud in the case of the next-door neighbour. We want a degree of flexibility between negligence and fraud. We certainly want the regulations to provide for a penalty suitable for fraud. In extreme cases, there will be criminal prosecutions, but we are anxious not to force them on the Inland Revenue when civil action, recovery and penalties would be a better solution.

Lord Higgins: Am I right in thinking, therefore, that this is an extra-statutory arrangement by the Inland Revenue?

Lord McIntosh of Haringey: The Inland Revenue will have regulations and guidelines to determine how its internal procedures will work in a particular case. I do not believe that some of them will be subject to parliamentary procedures.

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