Tax Credits Bill

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Mr. Webb: I do not have much to add. I first welcome the fact that the hon. Lady has tabled this amendment. I hope that it is the first of several from Government Members, who have a lot of expertise to bring to this issue, which we are lacking in our discussions. I know that that is convention, but I very much welcome the modest breach in convention that we have had this morning and I hope that we will see more of that.

As the hon. Lady says, this is clearly a probing amendment and we would not want specific figures in the Bill, not least because we want to index them.

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However, it would be tremendously helpful to get an idea of whether we are even in the right ballpark. I welcome the fact that we are discussing asymmetric thresholds. People who could gain a little bit ought to be able to get that, when it would cost more for the state to recover that little bit.

I am unclear on one issue, and would like the Minister's clarification on it. How many year-end reconciliations will there have to be? I presume that it will be one for every claimant, which will be something like 6 million. I suppose that makes me slightly nervous about the administrative burden. My point refers back partly to the hon. Lady's question about how the thresholds will be set. Can the Paymaster General produce any evidence from Treasury analysis based on panel data on fluctuations in people's incomes from one year to the next and the number of people on various thresholds? She is already indicating that she can, so I shall not elaborate further. Certainly these variations are helpful.

To return to my earlier point, £2,000 is the threshold where, if the income goes up a bit, we ignore it for tax credit purposes. If the income remains the same, the following year the whole £2,000 is counted in the calculation. Assuming that the taper is 35 per cent. the claimant will suddenly lose £700, even though his income has not changed. For those trying to budget on a relatively modest income, that is a hefty sum. There is a trade-off here: a big threshold means administrative convenience, but it also means big jumps the following year after when it drops out of the calculation. I am interested in the Minister's reflections on how that trade-off will apply.

Mr. Hoban: I have listened to the debate this morning and on Tuesday afternoon with growing concern about the complexity of the system of income assessment that we are putting in place. We have heard some clear explanations from the hon. Member for Northavon, who in a previous incarnation was a professor, and from a Minister who was a barrister—a distinguished barrister—and my own understanding of the Bill has been enormously enhanced by listening to their explanations.

However, I worry about how those who are being asked to advise claimants on the benefits will cope with the system. I think about my own surgery and about workers in citizens advice bureaux across the country. We are in danger of sucking claimants into a complex system if their income varies significantly from year to year, and we need more clarity. I welcome the suggestion of the hon. Member for Regent's Park and Kensington, North for some models, but I want to be sure that I understand the operation of the threshold.

When I intervened on the hon. Member for Northavon earlier, we agreed that the element above the threshold—in the hon. Gentleman's example it was £10 a week—would be assessed during the year. The change in tax credit would be implemented as a consequence of that £10 increase above the threshold—which in this case was assumed to be £20 a week. At the end of the year, when the reconciliation was done, would the calculation take into account the £20? In other words, if someone earns the £20

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threshold, will they receive a reduction or will they be told to repay their tax credit to the extent of that £20? If over a year they received £1,000 extra compared with the previous year and the threshold was, say, £2,000, would that £1,000 be ignored at the year-end reconciliation or would they have to repay the tax credit that they had received, which they were not entitled to because they received that extra £1,000?

Mr. Webb: There are two issues here: there is the current year and there is another year hence. My understanding of the system is, as the hon. Gentleman says, that the £10 above the £20 would be tapered down within the year if necessary and also at the end of the year. Therefore, there would be no question of suddenly doing something different at the end of that year, but another year hence, if nothing has changed, the whole income will be assessed, as I understand it, and that is when the jump will take place. I am not talking about a jump occurring at the end of the year. If nothing changes, the disregard disappears a year later.

Mr. Hoban: In a way I am more concerned about the first point, because the second already occurs: the working families tax credit claim exists for six months regardless of a change of circumstances and is then reassessed at the end of six months, and may change then, regardless of the fact that the income has not changed. However, I am concerned about the treatment of the disregard as part of the year-end reconciliation. Perhaps the Minister will explain—I am not sure which one will reply to this debate—in the concluding remarks how that disregard is treated as part of the year-end reconciliation and whether people will have to repay any excess that they have received as a result of the threshold operating during a year.

The Paymaster General (Dawn Primarolo): Good morning, Mr. Hood. As this morning's debate has shown, it is very important to ensure that the arrangements are correct. All members of the Committee will appreciate that it is important to set the figures in secondary legislation, so that we can return to the matter over the years. That is the quickest and most efficient way for Parliament to deal with the figures; indeed, that is how we deal with all rates and thresholds.

As my right hon. Friend the Financial Secretary explained in discussing the previous amendment, the clause seeks to provide maximum manoeuvrability in respect of the regulations. In drafting the provision, we have struggled with the question of what to say to constituents in our surgeries. Sometimes, simple matters that people understand clearly in terms of how to arrange their lives do not translate easily into legislation, but I should point out that it will not be necessary for claimants of the new tax credit, or their advisers, to read clause 7. We are trying to look sensibly at a series of principles and to strike a balance in legislation.

I should remind the Committee of the relevant arrangements. We want to move to a yearly assessment, so that we can offer certainty to those in receipt of the tax credit payment. Long-standing experience of family credit and the working families tax credit has shown that, although the six-month

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renewal offers certainty during that period, it causes problems at the point of renewal, particularly in terms of families and household planning. A longer period is necessary to enable a move into the labour market, a change of job or the arranging of child care. Our aim is to establish certainty over a longer period.

We settled on using the previous year's income because we want to minimise the information that a claimant must submit by using information already in the tax system—the P60 and the P45—that can be suitably fine-tuned. No extra information need be collected at that point, because it will be flowing to the claimant. In respect of a claimant who is moving from benefit into work, all the relevant information will be in the system and easily obtainable.

We recognise the points made by my hon. Friend the Member for Regent's Park and Kensington, North and others, but what if something dramatic happens to the family income in the current year? In such a situation, it would be unreasonable not to move into current year, but doing so creates a problem, to which the hon. Member for Northavon has referred a number of times. Instead of knowing precisely how much they had earned and demonstrating that to us, they would have to assess their earnings for the rest of the year. We must show responsiveness, but we do not want them, or our officials, to be ensnared into having to decide every two weeks whether they want their new tax credit reassessed. There is a trade-off between certainty and responsiveness.

In keeping with the hon. Gentleman's suggestion, we looked at the income of families from year to year, which vary slightly, and the causes of the really dramatic changes that may result in a far greater or lower payment of tax credit. If somebody's tax credit is only going to pay them on reassessment another 70p a week, there will be administrative costs, and problems for them. We do not want to drag people into current year's assessment, and we do not want them to think that because their income has changed by a few quid a week they should automatically inform us. Although that approach works well for increases in income, in which case it is easier to set, it is more difficult to set for a fall.

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As to what dramatically changes people's income, my hon. Friend the Member for Regent's Park and Kensington, North asked about the circumstances in which clause 7(3)(e) might operate. If a person became unemployed, which would be dramatic, they would move to current year assessment, they would fall back on to jobseeker's allowance or income support, and the system would kick in for child tax credit at the maximum amount. One point that is made about the working families tax credit is that it does not allow for flexibility because if a child joins a family, that will have a big impact. Other relevant examples include family break-up or incapacity through an accident at work. We can set those, but we must ask whether there are other circumstances in which income might change dramatically.

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Let me return to the point about hon. Members in their surgeries. We will not have to explain clause 7(3)(a), (b), (c), (d) and (e) because the regulations would have settled the matter. People will be given advice, and, as my hon. Friend said, when they receive notification of their tax credit, it will be explained to them. As a caveat, we are working closely with all interested organisations and bodies which advise people such as citizens advice bureaux and the Child Poverty Action Group on the circumstances in which tax credits would be triggered.

That left us with the questions of whether there are any other circumstances in which income might change, and whether we should have the capacity to deal with them because it is a year's settlement. In the consultation, in which a vast array of organisations participated, the responses were balanced. Some said, ''Stick with previous year's income because it will iron out the following year when people are reassessed and at least they will know for 12 months.'' Others said, ''No. It is possible, although we cannot think of a scenario, and perhaps we should have that safety net.'' We are still having discussions because this is the insulation between the threshold and the tapers. We do not want to find at the end of the year that because people have been done in the current year's assessment, which they might have got wrong, they have been overpaid. Every member of the Committee can appreciate why we would want to avoid that.

Subsection (3)(a) to (e) allows every variation in rates and tapers to deliver what the Committee wants: certainty and a reasonable level of responsiveness that avoids the danger of people being paid too much. It is bad if they are underpaid, but at least they will receive a cash payment. If there is a huge overpayment, there will be difficulties and we do not want that. The arrangements allow us to make the final calculation.

A question then arises: if there are rises and falls, what do they need to be? We can be generous with a rise, because that will feed the work incentive and people will be better off for the yearthe hon. Member for Northavon is rightbut that will be included in the assessment when the next year comes. It will be a leg up for people in the year in which they make the transition. It will not be carried forward every year, but the Government are much more focused on ensuring that the fall is correctly balanced and that we do not bring people into the system for the sake of a few pence and do not leave them struggling when they should have had more credit. That is what we have provided, as my right hon. Friend the Financial Secretary said, in the arrangements under the clause.

I understand hon. Members' frustrations and that they would dearly love to know the thresholds and tapers, and some of the calculations. I am not in a position to provide the calculations for which my hon. Friend the Member for Regent's Park and Kensington, North and the hon. Member for Northavon have asked. We are extremely grateful for the continued advice and discussion to ensure that we address the point made by the hon. Gentleman about the experience of families and the rise and fall in their incomes.

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I know that my hon. Friend accepts that the figures would not be in the Bill, but they are certainly interesting. I cannot tell her whether she is in the same game, ballpark or anything else without setting some hares running, but I hope that I have been able to explain how the system will work.

Subsection (3)(a) allows us to use current-year-only income. Subsection (3)(b) allows us to use current-year-only income if it is higher. Subsection (3)(c) allows us to use current-year-only income if it is lower. Subsection (3)(d) allows us to use previous-year income. Subsection (3)(e) covers an emergency situation and allows us to exit the system and go to automatic maximum support. I realise that the provision looks complex in the Bill, but Inland Revenue officials and the parliamentary draftsmen have done a brilliant job in putting such a hugely complex provision into the Bill so concisely.

The regulations will be available in draft for hon. Members to examine at some stage. I cannot say that that will be tomorrow or next week, but it will be before the Bill has completed all its stages. They will be subject to normal parliamentary scrutiny when we have heard the rates and tapers in the Budget.

I hope that I have dealt with the points raised and, because I do not have legal training, have explained in more basic language, such as I would use with my constituents, when a move to current-year-income should occur. I assure the Committee, as did my right hon. Friend the Financial Secretary when speaking to the previous amendment, that the advice, guidance, opportunities to discuss directly with an adviser in job centres and Inland Revenue advice centres, the work that we will do with the agencies that give advice, and the advice, support and information that we will give to Members of Parliament will clarify and simplify the provisions. I hope that that deals with the hon. Gentleman's point.

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