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6.1 pm
Mr. David Ruffley (Bury St. Edmunds): I much enjoyed the speech of the right hon. Member for Birkenhead (Mr. Field). It was hugely important and was listened to with rapt attention and great respect on both sides of the House. I, for one, agreed with almost every word he said. I fear, however, that I will make a slightly more partisan contribution than the right hon. Gentleman.
I have not been a great fan of the Chancellor of the Exchequer's tenure of office. That is partly because some of his alleged achievements are damaging to the economic national interest. I believe that the Bill contains another set of his meddling measures that issue from No. 11, which will not redound to the credit of the tax and benefits system.
Incapability Brown, as I call the Chancellor, has shown himself unable to enhance the landscape of tax and benefits since his first Budget in 1997. In my judgment, the Bill bears five Brownian signature defects. In July, the Chancellor said that he would give us a draft Bill, and give us some detail. We have not had that. He said that the Bill would simplify and streamline the system but, as we have heard, more complexity is being introduced. He said that he would lighten burdens on business, yet we heard of many examples today where the burdens on business will increase. We have heard that the right hon. Gentleman wants an open debate on tax and spend, yet the scoring of tax credits—about which I will speak in a few moments—gives him and Ministers the ability to massage the national tax burden figures downwards by scoring tax credits as negative revenue. Of course, they are nothing of the kind—they are good old-fashioned public spending. Finally, the Chancellor says that under the Bill, working people will be better off. That is hardly the case when we know that hundreds of thousands—perhaps millions—of working couples who receive children's tax credit may, under the joint assessment regime in prospect, lose all, or substantially all, of the £520 a year they receive.
Let me deal first with the Chancellor's unwillingness to publish a draft Bill and much necessary detail to which many Members have referred. It is true that a consultation document with a regulatory impact assessment was
published on 19 July. That is fair enough. However, it was such a detail-free zone that the Institute for Fiscal Studies was prompted to say:
- "it provided no quantitative evidence on which one might base a sensible response."
It is virtually impossible to have a meaningful debate when the Government simply say that we should not worry because it will all be dealt with by regulations under clauses 7, 9 and 11. We should at least have some basic indicative numbers for the thresholds. The Paymaster General said that we were talking about a "framework" today, but such a framework is not meaningful without the detail. I urge those on the Treasury Bench to ensure that draft regulations are presented to the House far in advance of the Bill's Committee stage.
That leads me to my second Brownian defect. The claim is that the Bill will simplify the system. In truth, it will become more complicated because the Government are seeking to introduce means-testing on an annual basis, credit entitlement being based on the previous year's income and fixed for one year in advance. The problem is that families' financial circumstances change greatly within a year, and the Bill pays insufficient attention to that. How will changes be monitored effectively by the Revenue in-year? What will the notification requirements be? How will they be consistently—rather than erratically—enforced? Surely potential underpayments and overpayments, to which the hon. Member for Northavon (Mr. Webb) referred, will be greater under an annual system of assessment than under a six-monthly one undertaken for working families tax credit or, indeed, a weekly one for income support. Those are some of the questions that outside commentators are asking, and it is a great shame that we are not able to discuss them today.
The scale of the problem of having an annual basis for assessment rather than a shorter period is highlighted rather well by the labour force survey. It shows that 360,000 adults and couples with children and 90,000 lone parents change employment within three months in an average year. For those groups in which employment is changed within 12 months, the figures are 840,000 and 180,000 respectively.
An annual basis of assessment can, by definition, achieve greater simplicity only by ignoring, to an extent, changes in financial circumstances within the current year. If those circumstances are not ignored, the Revenue will have the problem that the Benefits Agency has—frequent and complicated in-year reassessments at various intervals. The Bill does not address that point; it simply says that the matter will be settled in regulations, which is regrettable. In particular, how easy will it be for claimants to estimate, with any degree of certitude, how changes in their current year income might relate to their previous year's income? Estimating changes will, in practice, be difficult to do over a year. Clause 7 attempts to provide an answer by stating that the regulations to be laid before the House could give claimants some leeway to ignore any potential change in their current year income as against their previous year's income.
In other words, a threshold will be set in which changes in income—either up or down—will be ignored. The problem is that, if that band is too narrow, the Revenue will have to instigate reassessments. If it is too broad and too much income is disregarded, huge overpayments to certain people whose financial circumstances improve in-year are possible for long periods, as are severe underpayments to those whose circumstances deteriorate in-year. So the setting of the threshold is critically important. The hon. Member for Northavon talked about asymmetry, and the reference to asymmetry applies to the point that I have just made.
For us to form a judgment about the delicate balance that Ministers will have to strike, we need to have at least some indicative numbers before us as soon as possible, so that we can debate this issue, which involves a fine judgment. It is not an easy judgment, but it is one that the House has to make. Regrettably, we do not have that information today.
I have assumed in my speech that claimants will make accurate or reasonably accurate estimates of current year income compared to previous years and faithfully report them. But I know some possible claimants in my constituency who, for whatever reason, will be confused about this issue or are not very good at numbers—a lot of hon. Members are not very good at numbers. So, in reality, it is a bit much to expect all claimants to be particularly adept at estimating current year income.
Although we know that, the Government will ask those people to make notifications of changes in their circumstances during the year. There is a severe risk that they will get that wrong and that they will continue to claim payments to which they are not entitled. They may not be acting fraudulently, but such things may happen by accident or through their incompetence in that regard. They will then be hit with a huge bill from the Inland Revenue for the repayment of overpaid credit at the end of the year, and I can envisage that causing severe problems.
The Revenue simply has not had to bother about those problems before because any errors or overpayments of that kind have been picked up through the payment of income support, because the assessment period is very short, or even by the working families tax credit, which involves a six-month assessment period. So we could be letting ourselves in for a great deal of trouble with our constituents by introducing annual assessments on that basis.
Ministers should tell us their thoughts on another issue—the hours test. I understand that, under the Bill, claimants will have to calculate their own average of hours worked to determine whether they satisfy the eligibility criteria. That is a change from the working families tax credit, under which employers typically carried out that work, and I wonder how the Inland Revenue will monitor it. Of course, in the United States, the earned-income credit regime does not require any proper checks or certification of hours worked to be carried out, and it is a bit of a disaster as a result. The Government are trying to do better than the American system, but how will the hours worked be monitored if not by the employers?
Thirdly, there is in the Bill a typical Brownian trademark measure—more burdens on business. Labour Members refer to reductions in burdens on employers, and there are one or two, but I suggest that there will be net
increase in such burdens. I shall refer to my concerns and the concerns of those who are in business in the constituency, but, before I do so, I congratulate the Government on deciding to pay the new child tax credit directly to the carer. That is an important reversal of their policy. We are returning to a wallet-to-purse policy, reversing the purse-to-wallet policy effected by the working families tax credit. However, the payment of working tax credit through the pay packet will only reinforce the enormous payroll burdens that are already placed on too many businesses in this country today.The Treasury and several hon. Members have argued that payroll payments reduce stigma, but that is not the case, and the right hon. Member for Birkenhead made that point rather well. There is no quantitative evidence to show that such payments reduce stigma, and it would be nice to know the results of the working families tax credit evaluation programme. If that evaluation can show that take-up of the working families tax credit has been increased and improved, fair enough. However, no such evidence exists, and I am rather surprised that the Government continue down that route without providing any evidence to show that the system reduces stigma and improves take-up.
The National Association of Citizens Advice Bureaux suggests that the qualitative evidence shows that payments through the payroll do not stop the stigma, and it gives two examples. First, some employers decide not to take on possible employees because they fear the paperwork. They simply do not take people on if they think that they will be involved in in-work benefit paperwork. Secondly, employers insist that employees work fewer than 16 hours. In fact, they reduce their employees' hours of work the better to ensure that they do not meet the eligibility criteria for the working families tax credit. That qualitative evidence comes not from the Opposition but from NACAB.
It is undoubtedly the case that businesses feel rather put upon. They feel that they are being turned into unpaid tax collectors and benefit administrators for the Department for Work and Pensions and the Inland Revenue. The Chancellor's assertion that burdens will be reduced will comfort them not. Ministers think that the burdens will not increase because of calculations that they have done, probably on the back of an envelope, showing that the number of new childless claimants of working tax credit, who were not eligible for the payroll regime under the working families tax credit, is exactly matched by the number of families that will receive child tax credit not through the payroll but direct from the Revenue.
In other words, those figures balance out. But that depends on the assumptions about eligibility that Ministers are making, so we return to the tapers and the thresholds. Without the evidence, we cannot judge the burdens on business and whether more businesses will have more payroll work. We cannot answer those questions, so it is incumbent on Ministers to undertake today to report back to the House when the system is up and running—if the Bill is passed—to show whether more businesses incur more compliance costs under the new regime compared with the working families tax credit.
If the Minister deigns to answer that question, it would be helpful if he would explain why the Federation of Small Businesses thinks that there is a lot of mileage in moving away from payment through the payroll to the
Inland Revenue paying working tax credits direct. That has been done for the child tax credit, so why not for the working tax credit?Fourthly, depending on how they are scored, the tax credits in the Bill can seriously affect the national tax burden—a politically sensitive subject, as we all know, in some cases to the cost of Ministers. The enthusiasm for tax credits as a general concept is in my view not unrelated to the fact that they afford hyperactive and meddlesome politicians the ability artificially to massage downwards the tax burden figures. The current Chancellor does not appear to like benefits very much, because they count as public spending, so he calls them tax credits and, miraculously, they stop being public spending items and become tax reductions. Put like that, it sounds completely outrageous if not downright absurd, but that is what the Harry Potter of the tax and benefits system is doing in the Bill. He is magicking out of existence public spending and scoring it as a tax reduction.
The Chancellor has done that already with the working families tax credit when he defied international conventions set out under the European system of accounts—ESA 95—which was adopted by our Office for National Statistics. He defied the ruling by counting all the working families tax credit as negative income tax in his preferred measure of the national tax burden.
The problem with such an approach is that it is a breach of international standards, because only 20 per cent. of working families tax credit claims relate to relieving an income tax liability. The other 80 per cent. of claims cannot conceivably be described as negative income tax, because there is no income tax liability to be relieved. I hope that this is parliamentary language, but that is a complete fiddle of the tax burden numbers by the Chancellor. He knows it and we know it, but I fear that such dodgy creative accounting will be perpetrated for another few years if the Bill's tax credit regime is implemented.
Fifthly, another signature Brownian touch is evident in the Bill—our dear old friend the stealth tax. Under the Bill, we face the prospect of a new regime of joint assessment of income. This time the stealth tax could be imposed on middle-income families with children in middle England who currently receive the children's tax credit. When the Chancellor abolished the married couples allowance, he said to couples with children, "Don't worry. You'll be compensated." However, they lost out for a year and they had to wait until the children's tax credit was introduced. As we know, that was worth £520 to those who got the full whack.
If one person in the couple earned more than £33,395 a year but less than £41,735, the couple would receive a proportion of the £520 on a sliding taper. If both members of the couple earned less than £33,395, the family unit received the full whack of £520. That is fine, but if they both earned below the threshold, their gross income could be well over £40,000. It might be nearer £60,000 but the couple would receive the full £520 under the rules that operate now and as we understand them.
However, if joint assessment is introduced, Opposition Members have expressed the fear that people on moderate incomes—for example, a couple earning £25,000 a year each with a gross income of £50,000 a year—would
receive absolutely nothing because they jointly earn more than the threshold of £41,735. They would lose the entire £520, and that is the prospect with which the Bill presents us. It is another Brownian stealth tax.On House of Commons Library figures, 1.4 million couples with children who currently claim the children's tax credit will lose out: 500,000 will lose part of their credit and 900,000 will lose the credit in its entirety because they will receive nothing. Will the Minister allay the concerns of many couples with children in middle England and even of observers in the City? Ann Redston, the senior tax partner of Ernst & Young, observes:
- "The Chancellor was strangely reluctant to give us any idea of how many families will be able to take advantage of the Child Tax Credit. He should show his hand."
The Bill's author is a Chancellor who constantly repackages and chops and changes the tax and benefits system. Too much policy has been made on the hoof since 1997 and I fear that it has been driven by his desire to run other Departments from the Treasury. The result is a lack of true strategic vision in the system and more complexity.
As I have said, the Bill discloses a desire for more stealth taxes, but we have had little debate about the detail of them because the Chancellor wants to leave that to regulations and to consideration in Committee. Incapability Brown has, unfortunately, left too many unanswered questions in the Bill. He is not so much Incapability Brown as Complexity Brown. That is bad news not just for the Departments that will have to try to administer the new system and the businesses that will face more burdens as they try to operate it, but bad news for the men and women who the Bill is most designed to help—those who want genuine incentives to return to work. That is why I am glad that Conservative Members will not vote for the Bill in the Lobby tonight.
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