Tax Credits Bill

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Mr. Hugo Swire (East Devon): This is a good clause, and we owe it to the Bill and to the taxpayer to spend some time on it. I welcome the Paymaster

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General to the Committee. She should not be held responsible for the observations of a colleague, especially as she was not in the Room, but the Financial Secretary accused Conservative Members of indulging in gesture legislation. That is not what we are doing, and I regret that he took that view. It would be a dereliction of our duty and a disservice to the taxpayer were we not to examine the provision very carefully.

I do not want to spend the entire sitting quoting the comments of the right hon. Member for Birkenhead, but given his great knowledge of the subject—no doubt he will have plenty more to say on Report—it is worth going over some of his concerns about tax credits. He said:

    ''It would be difficult to operate this system honestly in the Garden of Eden, let alone the real world.''

He went on to estimate that the level of fraud against tax credits is at least as high as that against conventional welfare payments such as housing benefit, which currently runs at about 70 per cent. Perhaps regrettably, we inhabit the real world, not the garden of Eden, so that was a pertinent comment.

I grant that no Government should be put off their legislative programme because of the possibility of fraud. That would be utterly ridiculous. However, in instigating new legislation they have a duty to ensure as far as they can that fraud is not an option, or at least not a welcome option. The thought of the Garden of Eden and the temptation to err reminds me of an incident from my days in the armed services, when I had some money removed from my room in the barracks where I was stationed. The miscreant was apprehended and suitably punished, but I was punished with equal vigour on the grounds that I had put temptation in his way. I did not see the justice in that, but having had time to reflect in the intervening 20 years I can accept that it had some logic, even if it was a little warped. It was a salutary lesson.

When the working families tax credit and the disabled person's tax credit were first introduced, questions were asked about the scope that they presented for fraudulent claims. Again, I must refer back to the right hon. Member for Birkenhead, who was instructed by the Prime Minister to go away and think the unthinkable on the whole area of welfare reform. He took him at his word and was summarily dismissed, which makes one suspect that the best policy for advancement in the Labour party is not to think at all. In 1998, he warned that

    ''the whole of the family tax credit venture is fraught with great dangers. It offers huge bonuses for dishonesty. It strengthens the employer's hold over working people—'these are the conditions: cheat and both of us will be better off.' It thereby pulls employers into a spider's web of dishonesty and corruption. It rewards employers paying low wages. It takes the pressure off improving productivity and thereby the scope of increasing real wages.''

My hon. Friends the Members for Arundel and South Downs (Mr. Flight) and for Hertsmere have argued well that a distinction should be drawn between those who commit deliberate fraud and those who do so inadvertently. Although we touched on that issue in previous sittings, I would welcome the

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Paymaster General's thoughts on it. We should also remember the story of individual learning accounts, to which reference was made this morning. They raised the hopes and aspirations of those who subscribed to them—many such people were my constituents—only to be dashed when the entire system was withdrawn because of fraud. We therefore owe it to the taxpayer and to our constituents to ensure that the Bill will stand the test of time.

On benefits, it is perhaps worth considering the experience of other countries. In Canada, the extent of fraud in the working income supplement, or WIS, was so great that it is returning to a benefits-based system. Lessons might also be learned from the United States, where the earned income tax credit has led to tremendous problems with fraud. An Internal Revenue Service study of tax compliance, published in early 1997, found that taxpayers claimed $4.4 billion more in earned income tax credit refunds than they were eligible to receive. Between 1986 and 1996, federal spending on earned income tax credits increased from $1.7 billion to $18 billion, leading The Economist to state in 1995:

    ''There is no longer consensus that the ETIC is a sensible addition to America's anti-poverty programmes.''

Yet, as has been said, one of the main tenets of such legislation is to combat poverty.

Applicants for the working families tax credit and the disabled person's tax credit are asked to provide documentary proof of earnings. Where they are unable to do so, employers are asked to provide such details. However, in line with efforts to encourage electronic applications, to which the Paymaster General referred in a previous sitting, claimants for the new tax credits will not be asked to provide documentary proof of income with their application, although the Inland Revenue will reserve the right to check the information provided by consulting them or their employers. According to the Government, that

    ''will remove the need for the Revenue routinely to contact employers for proof of an employee's earnings.''

Mr. Mark Hoban (Fareham): Does my hon. Friend agree that the risk with such legislation is that those who try to commit fraud and are challenged by the Inland Revenue to produce documentary evidence will be able to say, ''Oh, it was a mistake''? Removing the requirement to produce documentary evidence at the outset will enable more people to claim that they made an honest mistake.

Mr. Swire: My hon. Friend is entirely right, and I hope that he will return to that point in his speech.

Because of the Government's determination to pay tax credits through the payroll, the Inland Revenue administers them. As I understand it, they are therefore not subject to the new powers in the Social Security Fraud Act 2001, which aims to reduce the cost of welfare fraud. In introducing the Bill, it should be the Government's aspiration not only to increase benefits to those who need them most, but to reduce the amount of welfare fraud. As the hon. Member for Regent's Park and Kensington, North (Ms Buck) pointed out, to do so would ostensibly release more

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funds to those who need them—an aspiration with which we can all concur.

This perceived inconsistency was highlighted during consideration of the Social Security Fraud Bill. However, the Government affirm that such payments are tax credits and, as such, cannot be aligned with other welfare benefits.

This morning, my hon. Friend the Member for Hertsmere questioned the Revenue's target of investigating 1.5 per cent. of applications per tax credit. I mentioned that subject on Tuesday morning, and asked the Paymaster General how that figure was arrived at. She replied that we were dealing with a different clause, but that we would doubtless return to the matter. We have, and I hope that she will enlighten us as to whether that figure was calculated, or is an arbitrary one plucked from the air.

This morning, the Financial Secretary talked about activity on the ground in pursuing those who abuse the system, and said that the commissioners would not hesitate to prosecute. More worryingly, he also said that the more substantial the fraud, the more likely the board's wish to prosecute. We all live in the real world—as I have said, we do not inhabit the Garden of Eden—but I should be extremely worried to discover that only those who make the headlines will be prosecuted, and that the intention is to go after only the big fish. The Financial Secretary suggested that this issue is related to the Conservative party's so-called new image, but that has nothing to do with it. It is a matter of common decency that everyone be equal under the law. Those who commit fraud, of whatever degree—

The Paymaster General (Dawn Primarolo): While the hon. Gentleman is on his feet, can he say whether the principle that he is outlining should also apply to the 26 million taxpayers? Rather large numbers of them occasionally make errors, and some find new wheezes to avoid paying the amount of tax that they should.

Mr. Swire: Indeed. The Paymaster General will know better than I do that people who avoid paying tax due are committing a crime.

Mr. Flight: Evading.

Mr. Swire: Exactly. The Paymaster General will doubtless wish to return to my valid point—my hon. Friends the Members for Arundel and South Downs and for Hertsmere also made it—about those who commit fraud through deliberate deceit, and those who do so inadvertently because of the complexity, to which I referred on Tuesday morning, of legislation such as this. The amendment argues for a stronger deterrent to protect people. We are talking not about a magic sum that the Government are handing out in a gesture of selfless kindness, but about taxpayer's money that will be taken out of one pot and put into another. As I said at the beginning of this debate, it would be a dereliction of our duty were we not to do everything in our power to ensure that fraud is kept to an absolute minimum, and that those who deliberately

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perpetrate fraud are penalised to the absolute maximum.

Mr. Hoban: Having been tempted by my hon. Friend the Member for East Devon (Mr. Swire) into speaking to this important part of the Bill, I do not wish to disappoint him. I want to talk relatively briefly about two issues related to fraud: the opportunity for connivance between employers and employees in committing fraud, and the extent to which the Bill's complexity might encourage people to commit fraud.

Connivance between employer and employee is an issue that has been raised on several occasions, and in that context I want to touch particularly on the thresholds for the notification of claims for reassessment. I am especially concerned about the threshold when salaries or incomes go up, not when they come down. Depending on how wide the threshold for notification of upward changes is, I wonder whether employers might be encouraged to strike a deal with employees, whereby pay rises will not go above the threshold so that the tax credit recipient will not have their tax credit reduced. From year to year, we might see employers restrict pay increases in line with their employees' wishes to such an extent that employees do not have to go through reassessment. Yes, they will be reassessed at the start of the next tax year, as was said in the debate last week.

2.30 pm

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