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Tax Credits Bill

These notes refer to the Tax Credits Bill as introduced in the House of Commons on 28th November 2001 [Bill 59] TAX CREDITS BILL __________________ EXPLANATORY NOTES INTRODUCTION 1.     These explanatory notes relate to the Tax Credits Bill as introduced in the House of Commons on 28 November 2001. They have been prepared by the Inland Revenue in order to assist the reader of the Bill and to help inform debate on it. They do not form part of the Bill and have not been endorsed by Parliament. 2.     The notes need to be read in conjunction with the Bill. They are not, and are not meant to be, a comprehensive description of the Bill. So where a clause or part of a clause does not seem to require any explanation or comment, none is given. SUMMARY OF THE BILL Background to the Bill 3.      In his March 1999 Budget, the Chancellor of the Exchequer announced that the Government intended to create two new tax credits, one for families with children and the other for working households facing disadvantage. In his March 2000 Budget, the Chancellor announced that the new credits would be introduced from 2003. 4.     In July 2001, the Inland Revenue published a consultative document, New Tax Credits: Supporting families, making work pay and tackling poverty 1 which set out how the Government envisaged the new credits would work and sought views from interested parties. Over 170 responses to the consultative document were received by the end of October 2001. 1 This document can be obtained free of charge from the Inland Revenue Visitors Information Centre, Ground Floor, South-West Wing, Bush House, Strand, London, WC2P 4RD. Alternatively it can be accessed on the Internet at www.inlandrevenue.gov.UK/consult-new 5.     Following consultation, the Government is taking forward primary legislation in the Tax Credits Bill. It provides for two new tax credits - the child tax credit for families with children and the working tax credit for working households facing low income, including those in which a worker has a disability. The introduction of the new tax credits is intended to create a single income-related strand of support for families with children, complemented by a single strand of support for adults in work. The new tax credits will be administered by the Inland Revenue. 6.     As announced in June 2001, to rationalise the administration of all aspects of Government support for children in one department, responsibility for child benefit and guardian's allowance will be transferred to the Inland Revenue. The Child Benefit Centre (and the Child Benefit Office in Northern Ireland) will become part of the Inland Revenue. The Bill also makes provision for that transfer. The current position 7.     There are several existing forms of support for families with children, low-income households and disabled workers. Those elements relevant here are: income support (IS) and income-based jobseeker's allowance (JSA); child benefit; child dependency increases (CDIs) paid as additions to some non-means tested benefits; the existing tax credits, working families' tax credit (WFTC), disabled person's tax credit (DPTC) and the children's tax credit (CTC); and the New Deal 50plus employment credit. 8.     IS and JSA are social security benefits which provide a minimum income to a claimant who is working fewer than sixteen hours a week and whose partner (if any) is working fewer than twenty-four hours a week. There is a separate minimum income level for people aged 60 or over. JSA has two components: a means-tested or "income-based" element and a "contributions-based" element dependent on a person having paid the necessary National Insurance contributions. For the purposes of this Bill, we are concerned only with income-based JSA. 9.     Entitlement to IS/JSA is calculated on a weekly basis. The amount to which a person is entitled is the difference between their income and their applicable amount. Different applicable amounts are prescribed, depending on whether the claimant has a partner, any dependent children or is disabled. A person is not entitled to IS or JSA if their capital exceeds a prescribed amount (currently £8,000 for those under 60). A person aged 60 or over is not entitled to the minimum income level if their capital exceeds £12,000. 10.     Child benefit is a social security benefit paid universally to those who are responsible for children under 16 (or 19 if they are in full-time, non-advanced education). It is not means-tested. 11.     CDIs are included in the weekly rate of some non-means-tested benefits. The benefits in question are: incapacity benefit; residual severe disablement allowance; invalid care allowance; widowed mother's allowance; widowed parent's allowance; and retirement pension. 12.     WFTC is a payable tax credit introduced in October 1999 by the Tax Credits Act 1999, replacing family credit. It is available to an individual or couple with dependent children, provided that individual or at least one partner in the couple works sixteen or more hours a week. It includes help for child care costs which, for couples, is available where both partners work sixteen or more hours a week. WFTC is income-related and awards are fixed for six months. Payment is usually made through employers, although couples can arrange for payment to be made directly to a non-working partner by the Inland Revenue. 13.     DPTC replaced disability working allowance at the same time as WFTC was introduced. It is administered in the same way as WFTC but is available to disabled people who work sixteen or more hours per week, irrespective of whether they have children. 14.     CTC is an income tax relief introduced in April 2001. It is worth up to £520 in the current tax year, 2001-02, but is limited to the amount of income tax which would be payable, if that is less than the full value of the credit. It is available to individuals and couples with a child under 16 living with them for at least part of the tax year. CTC is gradually withdrawn where a claimant has income in the higher rate band for income tax. From April 2002, a higher rate of CTC will be available in respect of children born in the tax year. 15.     New Deal 50plus is a voluntary programme which was launched nationally in April 2000. The programme aims to help people aged 50 or over to go back to work. People receiving income-based jobseeker's allowance, incapacity benefit, severe disablement allowance or income support for six months or more are eligible for New Deal 50plus. Support is also available in respect of dependent partners of people receiving these benefits. Those who have received invalid care allowance or the bereavement and widowed parent's allowances for a period of six months have immediate access to the programme on successfully claiming one of the four qualifying benefits. New Deal 50plus offers jobseekers a tax-free employment credit of £60 per week for up to a year for those going into full-time work (and £40 for part-time work), and an in-work training grant of up to £750 provided their annual income is no more than £15,000. These are also available to those entering self-employment. Structure of the Bill 16.     The main elements of the Bill are: Part 1 (clauses 1 to 44) which establishes the administrative framework for the new tax credits, and sets out the conditions of entitlement to, and the elements of, those tax credits; Part 2 (clauses 45 to 53), which transfers responsibility for the administration of child benefit and guardian's allowance from the Department for Work and Pensions (DWP) and, in Northern Ireland, the Department for Social Development (DSD) to the Inland Revenue; Part 3 (clauses 54 to 65), which contains miscellaneous and supplementary provisions. Measures in the Bill Tax Credits 17.     The new tax credits measures are contained in Part 1 (clauses 1 to 44 and Schedules 1, 2 and 3). 18.     Clauses 1 to 7 set out the general framework for the new tax credits, in particular: abolition of the current tax credits, the child allowances in IS and JSA and CDIs and their replacement by child tax credit and working tax credit (clause 1); the functions of the Inland Revenue in respect of the new tax credits (clause 2); the need for claims to the new credits to be made in the prescribed manner (clauses 3 and 4); the period of the award (clause 5); the need for claimants to notify the Inland Revenue of certain changes in their circumstances (clause 6); and the definition of "income" for the purposes of the income test (clause 7). 19.     Clauses 8 and 9 describe the conditions of entitlement to, and the structure of, the child tax credit. Broadly, the child tax credit will draw together all the existing income-related means of support for families with children - the child elements in IS, JSA, WFTC and DPTC, in addition to CTC - into one payable credit. It will be available to households with at least one child under 16 (or under 19 if in full-time non-advanced education), irrespective of whether anyone in that household is working. It will consist of a basic family element and an element in respect of each child or young person (the second element will be higher in respect of any disabled or severely disabled children). 20.     Clauses 10 to 12 describe the conditions of entitlement to, and the structure of, the working tax credit. The working tax credit will provide support to working adults who face disadvantage because they have a disability or are in low-income households. It will draw together the adult elements in WFTC and DPTC and the employment credit for those returning to work under the current New Deal 50plus scheme. It will consist of several elements: a basic element; an element for lone parents or couples; a further element for those working a certain number of hours per week; an additional element for workers who have a disability; an additional element for claimants with a severe disability; an additional element for those over a prescribed age returning to work (this will be time limited); and an element to help meet child care costs with an approved provider. 21.     Clause 13 provides for the mechanism under which the amounts payable will be reduced if the income of the claimant household exceeds a certain threshold to be set by regulations. 22.     Clauses 14 to 22 describe the decision-making process in respect of entitlement to the new tax credits and the rate of each award and the Inland Revenue's powers to make enquiries about a claim. 23.     Clauses 23 to 28 set out the arrangements for payment of the new tax credits. Many of the details of these arrangements will be prescribed in regulations. In general, however, payments of the child tax credit will be made directly to the main carer of the child or children, in arrears at weekly or four-weekly intervals as claimants choose. The working tax credit will be paid to employees by their employers with their wages, but it will be paid directly to the self-employed or to those employees whose employer does not operate a full Pay-As-You-Earn (PAYE) scheme. The Inland Revenue will have the power to recover overpayments of the new tax credits. Clause 26, which introduces Schedule 1, is intended to ensure that employees should not suffer unfair dismissal or other detriment because of their employer's obligation to pay working tax credit. 24.     Clauses 29 to 34 and Schedule 2 provide for sanctions to be imposed in certain cases and for information powers in cases of suspected fraud in relation to tax credits. These cases include: where incorrect statements or declarations have been made in a claim or incorrect information has been submitted in support of a claim; where there has been a failure to provide required information or evidence; where there has been a failure to tell the Inland Revenue about certain prescribed changes in circumstances which might affect a household's entitlement to the credits (for example, changes in child care costs); or where a person is knowingly concerned in fraudulent activity with a view to obtaining tax credits. 25.     Penalties may also be imposed on employers for failing to maintain and provide accurate information or documents and for failure to make payments of working tax credit. 26.     Clause 35 provides for interest to be charged on an overpayment of tax credits if that overpayment is attributable to fraud or neglect on the part of the claimant. Penalties imposed under clauses 29 to 31 also carry interest. The rates of interest will be set by regulations. 27.     Clauses 36 and 37 set out the appeal mechanism. Clause 36 describes claimants' rights of appeal against Inland Revenue decisions on the rate of an award, provisional decisions on whether an award should be made, where an award is revised following an enquiry or the discovery of new facts, or where a penalty is imposed. Clause 37 specifies the appeal procedures, either to the General Commissioners or, if the appellant so chooses under the Taxes Management Act 1970, to the Special Commissioners. 28.     Clauses 38 to 44 are supplementary measures. Clause 38 provides powers to make regulations about how tax credits should apply in the case of persons subject to immigration control. Clause 39 provides similar powers in relation to polygamous marriages. Clause 40 makes clear, for the avoidance of doubt, that the Bill is to apply to the Crown in its capacity as an employer. Clause 41 provides for tax credits to be treated as inalienable. Clause 42 enables the Inland Revenue to give notices in relation to tax credits in the manner and form they consider appropriate. Clause 43 introduces Schedule 3, which makes consequential amendments to other legislation to refer, where necessary, to the new, rather than the existing, tax credits. Finally, clause 44 sets out definitions relevant to Part 1 of the Bill. Child benefit and guardian's allowance 29.     The transfer of functions in relation to child benefit and guardian's allowance is contained in Part 2 (clauses 45 to 53 and Schedule 4). Broadly, both benefits will remain payable on the same basis as now. 30.     Clauses 45 to 50 set out those functions which will be transferred from the Secretary of State for Work and Pensions (and, in the case of Northern Ireland, from DSD) to the Treasury and the Inland Revenue. Functions to be transferred include the power to set the rates of benefit and conditions of entitlement, procedures for claims, payments and the recovery of overpayments, powers of enquiry and investigation, and the decision making and appeals process. Schedule 4 makes consequential amendments to other legislation in the light of the transfer of functions. 31.     Clause 48 provides for the Treasury or the Inland Revenue to take over all property, leases, service agreements, staff contracts and legal liabilities in respect of the responsibilities of DWP (and the Child Benefit Office in Northern Ireland) in relation to the transfer of functions. Clause 49 makes provision about the functions of the Inland Revenue in respect of child benefit. 32.     Clauses 51 to 53 make minor changes in the entitlement rules for child benefit and guardian's allowance to align them more closely with what is proposed for child tax credit. In particular, clause 51 provides that these benefits may remain available for a certain period (to be set by regulations) after the death of a child. Clause 52 removes the 182 day period during which child benefit is not available following the entry of a child or parent into the UK. Clause 53 removes the existing bar to child benefit if a member of the family has tax-exempt income. This is intended to ensure that families entitled to the new tax credits are not excluded from receiving child benefit. Supplementary provisions 33.     Part 3 (clauses 54 to 65 and Schedules 5 and 6) introduces supplementary measures, principally: clause 54 enables DWP and DSD in Northern Ireland to carry out functions relating to claims for new tax credits, child benefit and guardian's allowance, on behalf of the Inland Revenue clause 55, and Schedule 5, allow for exchanges of information within the Inland Revenue for the purposes of considering claims to the new tax credits, child benefit or guardian's allowance or for other functions exercised by the Inland Revenue. They also provide for exchanges of information relating to tax credits, child benefit and guardian's allowance between the Inland Revenue and other Government Departments, for the purposes of new tax credits, child benefit and guardian's allowance, and to assist other departments in the exercise of their functions, for example, social security functions in the case of DWP; clause 56 introduces Schedule 6, which sets out consequential repeals of legislation; clause 57 deals with commencement of the provisions in the Bill; clause 58 allows the Treasury, by order, to make transitional provisions and savings to help the transition from the current systems to the new tax credits. The Secretary of State for Work and Pensions (in Northern Ireland, DSD) may, by order, make transitional provisions and savings in relation to CDIs, since they remain the responsibility of those Departments; clause 59 amends the Northern Ireland Act 1998 so that matters relating to the new tax credits, child benefit and guardian's allowance can be dealt with on a UK-wide basis; clause 60 sets out the powers of the Treasury and the Inland Revenue to make regulations under the Bill by statutory instrument and clause 61 provides for the regulations to be subject to the negative resolution procedure. COMMENTARY ON CLAUSES PART 1: TAX CREDITS Clause 1: Introductory 34.     This is an introductory clause, which creates two new tax credits known as child tax credit and working tax credit. It also sets out those elements of existing systems of support which are to be abolished and replaced by support through the new tax credits (subsection (3)). They are: the children's tax credit; working families' tax credit and disabled person's tax credit; the child-related elements of income support and income-based jobseeker's allowance; the various increases paid in respect of dependent children in certain non- means-tested benefits; and the employment credit element of the New Deal 50plus scheme. Clause 2: Functions of Board 35.     Subsection (1) of clause 2 brings the new tax credits under the care and management of the Commissioners of Inland Revenue ("the Board"), which confers the same management discretion on the Board in relation to tax credits as they have in relation to the other matters for which they are responsible. Subsection (2) provides that tax credits are to be paid from tax receipts, as is the case under the Tax Credits Act 1999. Subsections (3) and (4) make consequential amendments to definitions in the Inland Revenue Regulation Act 1890 to include tax credits in the scope of "inland revenue", allow the Board to appoint persons to pay and manage tax credits, and require the Board to account separately for tax credits. Under the Inland Revenue Regulation Act 1890, most functions of the Board may, in practice, be exercised by Inland Revenue staff. Subsection (5) makes consequential amendments to the provisions in the Taxes Management Act 1970 that require members of Inland Revenue staff and the General and Special Commissioners to make a declaration of secrecy. Clause 3: Claims 36.     Clause 3 contains the main provisions about claims to tax credits. Entitlement to a tax credit will depend on making a claim for it. Claimants must be aged at least 16 and be in the United Kingdom. Regulations may set out the circumstances in which someone is to be treated as being, or not being, in the United Kingdom, for example, to allow for temporary absences on holiday. Claims may be made jointly by married or unmarried couples, or by individuals who would not be entitled to make a claim as part of a couple (subsection (2)). For the purposes of this Part, the definition of married couple follows that used for income tax and means any married couple in which the partners are neither formally separated nor separated and likely to remain so permanently (subsection (3)). An unmarried couple is defined as a man and a woman living together as husband and wife (subsection (4)). Individual claimants make a "single claim", and couples make a "joint claim" to tax credits. Clause 4: Claims: supplementary 37.     Clause 4 allows for the detailed requirements in relation to making claims to be set out in regulations. These regulations may: specify the manner in which a claim must be made and the time limits for a claim (subsection (1)(a)). in certain circumstances, allow a claim to be treated as made on a date different from the date on which it is actually made (subsection (1)(b)). For example, they may allow a claim to the working tax credit to be treated as made on the date of an earlier claim if the reason the earlier claim failed was because the person was awaiting a decision from DWP on their claim to a disability benefit which was later successful; allow claims to be made covering a period wholly or partly after the date of the claim - for example, in advance of the tax year. In cases of this kind, tax credit awards may be conditional on the relevant qualifying criteria being met when the award actually becomes payable (subsection (1)(c) and (d); allow the executors or administrators of a deceased person's estate to make or continue with a claim on behalf of the estate (subsection (1)(e)); in certain circumstances, enable one person to act on behalf of another in making a claim or one member of a couple to be taken as acting for the other in the case of a joint claim (subsection (1)(f) and (g)). For example, a person who is mentally or physically incapable of making a claim may be able to have his claim made on his behalf by a representative; and allow claimants to be treated as having made a claim to tax credits (subsection (1)(h)). This will allow certain awards to be renewed each year, without a new claim being required, as may happen now for CTC claims. 38.     The clause also enables the Board to disclose to a claimant (whether or not a joint claimant) information in relation to the claim or the award of tax credit resulting from it. For example, where a couple have made a joint claim and one member of that couple notifies the Board of a change of circumstances, the Board can explain to the other member of the couple why it has amended the award. Clause 5: Period of awards 39.     Clause 5 sets out how long tax credit awards last and what brings an award to an end. A claim made before a tax year starts gives rise to an award for the full tax year (subsection (1)). Otherwise, the tax credit award starts on the date of claim and runs to the end of the tax year (subsection (2)). 40.     But a claim comes to an end if: a couple who have made a joint claim stop being entitled to make such a claim (that is, they separate); or an individual who has made a single claim becomes part of a couple and stops being entitled to make a single claim (subsection (3)). 41.      Changes in the circumstances of the claimant or claimants that change the rate of tax credit they could be entitled to (for example, the birth of a new child) do not bring the tax credit award to an end (subsection (4)). An award does end, however, if a change of circumstances means the claimant or claimants no longer meet the entitlement conditions for the tax credit (subsection (5)). Clause 6: Notifications of changes of circumstances 42.     Clause 6 sets out the arrangements for the notification to the Board of changes of circumstances affecting people's entitlement to tax credits. 43.     Regulations may provide that a change that increases the maximum amount of tax credit payable on a claim takes effect only once the Board has been told about it (subsection (1)). However, regulations may also allow for the notification of the change to be treated as having been made earlier or later than it actually was - this will allow scope to backdate a change in the amount of the award in certain circumstances. Similarly, the regulations may in certain circumstances allow a notification to be made for a period after it is given and may make a change in the tax credit award contingent on the qualifying conditions being met when the change takes effect (subsection (2)). This follows the approach taken to claims in clause 4. 44.     Clause 6 also allows regulations to be made requiring claimants to notify the Board where: an award comes to an end because joint claimants have split up or an individual claimant has become part of a couple; or there is a change of circumstances of a prescribed description which may reduce the rate of tax credit payable or bring entitlement to an end (subsection (3)). 45.     The clause also allows for regulations, similar to those for claims, to make provision about how and when a notification of change should be given and about who may be entitled, or required, to notify a change. The regulations may also set out the circumstances in which one person can act for another in relation to a notification (subsection (4)). Clause 7: Income test 46.     Subsection (1) of clause 7 provides that entitlement to a tax credit is dependent on the income of the claimant(s). The starting point is that an income threshold may be set in regulations. If the income of the claimant or claimants falls below the threshold, the full amount of tax credit for which they are eligible is payable. But if that income exceeds the threshold, all or part of their entitlement may be withdrawn (see clause 13). 47.     The income test introduced by this clause is not to apply in the case of claimants entitled to prescribed social security benefits. Such claimants automatically receive tax credits at the maximum rate for as long as they stay on those benefits (subsection (2)). 48.     The income to be taken into account in determining entitlement to tax credits will be income for a tax year. The basic proposition is that awards are based on the current year income. But the clause allows regulations to be made to enable previous year income or an adjusted measure of current year income to be used in certain circumstances. The regulations may set monetary thresholds related to changes in income between the current and previous years. A change in income smaller than the threshold(s) prescribed in regulations would mean claimants received tax credits based on their previous year income. If income moved between one year and the next by more than the threshold(s), the amount of tax credit due would depend either on the current year income, or, if regulations so provided, on current year income adjusted by the threshold (subsection (3)). 49.     The effect of this is to provide flexibility for entitlement to tax credits not always to be based on actual income in the current year. So it would be possible for claimants with relatively small changes in income to have awards based on their known previous year income. The regulation-making powers would also make it possible for changes in income below prescribed amounts to be ignored and for the first slice of a change in income to be left out of account in determining entitlement. 50.     The clause sets out that, for joint claims, the income for a tax year is the aggregate income of each of the partners for that year (subsection (4)). Regulations may allow income to be treated as belonging, or not, to a particular tax year (subsection (6)). In particular, they may allow income of particular types for the last tax year but one to be treated as the previous year income of that type, instead of the actual amount for that year (subsection (7)). 51.     Regulations may also set out how income is to be calculated for the purposes of tax credits. A person may be treated in certain circumstances as not having income he does have or as having income he does not. This is intended as a safeguard against claimants appearing to deprive themselves of income for the purposes of making a claim (subsection (8)). 52.     The clause enables the Board, in certain circumstances, to make an estimate of the income of an individual claimant, or the aggregate income of joint claimants, in order to make an award or to change or withdraw an award. Such an estimate does not change the actual entitlement of the claimants to tax credits for the year (subsection (9)).

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Prepared: 29 November 2001