Tax Credits Bill

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Dawn Primarolo: Will the hon. Gentleman help the Committee by describing how the situation to which he referred will take place without showing itself in national insurance or tax returns, in an employment situation where the returns for all employees are going to the Inland Revenue, information is held on national insurance and tax, and the employer agrees, as many do, the rate paid with their employees? The employer would be inveigled in a very serious series of frauds.

Mr. Hoban: It is not beyond the imagination of anyone who has been involved in business to envisage a situation in which the declared income of an employee could go up, which could be reflected in the returns, but in which that increase had been restricted so as not to go above the threshold. That would not be committing serious fraud. It would be the employer and the employee manipulating the system together. That is especially likely to happen in small businesses where wage arrangements are dealt with on an individual basis, rather than with large employers, where rate is often agreed with trade unions or employee representatives. In the small business sector, where things are much closer and tighter, such discussions might take place between employees and employers.

Dawn Primarolo: So the employer would be committing another offence under the Bill, putting an employee under pressure to collude in misrepresenting the returns on payment made to the employee, by deliberately manipulating the system.

Mr. Hoban: We are talking about the way in which the thresholds could be exploited by employers or employees to achieve a better outcome. It is not unrealistic to think that connivance between employers and employees could happen, in the same

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way that cash payments can be made by the agreement of both parties. It is possible that connivance might take place and that that might be fraud.

Mr. Flight: Is the circumstance that my hon. Friend has in mind a small business in which there is a discussion, leading to an understanding that pay will go up by, for example, 6 per cent., but because the threshold kicks in at, say, 2 per cent., the employer says, ''OK, we'll go on paying 2 per cent., and, when we're out of the tax year, you can have a bonus equal to the difference.''? That sort of collusion may or may not fall within an offence under the Bill, but people certainly will not think that it does. It will eventually kick in in the next year, but it is the sort of bad habit to which I was endeavouring to refer earlier.

Mr. Hoban: I am grateful to my hon. Friend for that example, which is the sort of thing I have in mind. People might use the system in such ways to manipulate the terms and conditions of employees to the mutual satisfaction of both parties to the transaction.

That leads on to my next point, which is that the complexity of the system could give rise to behavioural changes. The Green Paper, ''Beating Fraud is Everyone's Business: Securing the Future'', said that complex rules make a great contribution to the occurrence of fraud. It stated:

    ''The detailed rules governing benefit entitlement, and contribution conditions, may also encourage behaviour which is fraudulent.''

The Green Paper identified three rules from which most fraud stems. They are:

    ''the rule that reduces income-related benefits when earnings cross a low weekly threshold; the rule that means that two people declaring that they live together as a couple receive less benefit than two who pretend that they live alone; and the rule that reduces income-related benefits where a person's financial capital exceeds £3,000.''

The latter point has been dealt with, in that the tax credit is based on investment income earned rather than on notional capital level, but the first two still apply in this situation. It will be interesting to see in the rules on benefit rates on the working tax credit in the Budget what the advantage and disadvantage will be for people declaring that they live alone or together. Comment has also been made on the type of event that gives rise to fraud in other benefits. Cohabitation, or failure to present that one is cohabiting, was a major cause of fraud in other benefits.

I am concerned that the complexity of the system may drive people to fraud either of their own volition or inadvertently. There are issues with processing delays. In my surgery, I have dealt with people who have put in a form for a benefit, and it has come back with a query, or more evidence is asked for. Such delays arise from the complexity of the system and people's failure to understand the rules and they encourage people to do such things as start work and not declare that they have changed their work status from unemployed to employed.

People working variable hours and in receipt of the 30-hour premium may, if they slip below 30 hours, fail to declare that their hours have fallen. That could be treated as fraud but, equally, could be classified as inadvertent error. People might not have been aware

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of the complex rules around the hours and what would happen were their hours above or below 30 a week. Complexity will give rise to the opportunity for deliberate and inadvertent fraud against the Inland Revenue.

Mr. Clappison: My hon. Friend is making an extremely valuable point about complexity. Does he agree that, on top of that, constantly changing rules are another source of non-compliance, if not fraud?

Mr. Hoban: Indeed. My hon. Friend makes a very good point. This is a flagship reform, two years after the first legislation was implemented. The rate of change in this area will, I think, confuse enormously claimants and those administering the benefit. The transfer of responsibility from the DWP to the Inland Revenue may also create an atmosphere of confusion and bewilderment for those receiving and those administering the benefits.

Confusion and bewilderment could provide a smokescreen for the deliberate fraudster. I raised a point with my hon. Friend the Member for East Devon earlier about people submitting income data to the Inland Revenue without any documentary evidence and saying, when challenged, that they were sorry, they got the numbers wrong. Such situations will arise when people can exploit the rules. Fraudsters might say, ''That was an honest mistake, Guv, it's a fair cop'', when in fact it was a determined effort to defraud the Inland Revenue and the taxpayer of tax credits and taxpayers' money.

I am concerned about the complexity of the Bill and the fact that it could allow employers and employees to connive in a way that is against taxpayers' interests. We should all take fraud seriously. When I read the answer that the Minister gave to my hon. Friend the Member for Hertsmere, it disturbed me to discover that of 52,000 investigations into the working families tax credit over two years, 8,800 led to recovery and of those, there were only 22 prosecutions, 13 of which were successful. Is it clear in the message that is going out to those who claim tax credits that fraud is against the law and that the Government will clamp down on it? That message does not seem to be coming out clearly, and, referring back to the Green Paper on fraud, the Bill provides an opportunity for people to commit fraud deliberately or inadvertently.

Dawn Primarolo: I welcome you to the Chair, Mr. Beard, and apologise that I was not able to be here this morning to hear the first part of what is proving to be an interesting and important debate. My right hon. Friend the Financial Secretary gave me a full briefing on points raised. He is now detained on Government business on the Floor of the House.

I will briefly explain how the Government are approaching the question of compliance, and put it in perspective. I should not like to accuse the hon. Member for East Devon of gesture politics—well, not at the moment anyway—because I am sure that he would not accuse the Government of the same; I will return to his points.

When ensuring the smooth working of the tax credit system, as with the working families tax credit, it is important to detect early, and prevent, abuses that

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may arise in the system. We do not pride ourselves on how many hundreds and thousands of our citizens we can take to court, even having failed to prosecute. A balance must be struck between ensuring that applications for tax credits are submitted correctly, and being able to identify errors, deliberate or mistaken, and correct them early on. That will be a deterrent in itself. Opposition Members talked about people learning of wheezes—they certainly do so in the tax system. However, I fail to see the point about those who seek to pay less tax than they know they should. I do not think that it is yet the policy of Her Majesty's Opposition to increase our prison population to prove the point about putting in one's correct return.

Mr. Flight rose—

Dawn Primarolo: I shall give way to the hon. Gentleman, but I can give him examples of big wheezes, with which he would not be unfamiliar because of the sector with which he was once more closely associated.

Mr. Flight: Let me repeat my point. For better or worse, in the payment of taxation, there is a fundamental difference between tax evasion and tax avoidance—one is within the law, one is without. The Government do their best to counter tax avoidance with various measures; we have debated them in this Room on many occasions. Under the system of income tax, there are obligations to complete tax returns and to provide other information that the Inland Revenue needs. That is as well ordered as it can be. Under the tax credit system, parallel disciplines do not exist and, as I explained, the way in which it will operate will not be understood by people in the way that our tax system is now readily understood, although it has become complicated.

The Paymaster General rightly points out that wheezes will develop all over the place. I hope that she will accept my point in the spirit in which it is meant, but under the system outlined for tax credits, there is a greater propensity for wheezes to develop that are not within the law.

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