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Tax Credits

12.31 pm

The Paymaster General (Dawn Primarolo): With permission, Mr. Speaker, I want to make a statement on the reforms that we have made, and are making, in the operation of the tax credits system, and to answer point by point the reports from the parliamentary ombudsman and the Citizen's Advice Bureau that were published today, and the adjudicator's report that was published earlier in the week. Those reports deal mainly with the operation of the system in its first year of introduction.

On 26 May, I announced to this House a series of measures to build upon the reforms that we have already made to the tax credits system. Those include measures to streamline procedures for recipients to inform Her Majesty's Revenue and Customs of the changes in their income during the course of the year, and to simplify the information provided to families in award notices. I also announced a review so that we could make changes in the procedures for dealing with disputed awards.

The Department is improving the helpline so that families receiving tax credits can have all their queries dealt with in one go and all their changes processed with one call to the helpline. Where there is a dispute, I have asked HMRC to consider suspending recovery of excess payments until the dispute is resolved. Where there is hardship, I have asked it to ensure that the additional payments in the system are made.

In other words, I have already taken measures to act on each of the major administrative issues raised by the parliamentary ombudsman and the CAB. Two weeks ago, during a debate in the House on these issues, I offered—and have subsequently agreed—to meet a group of MPs to discuss these issues in detail. Today, I will be writing to the ombudsman and the CAB about the changes that we have already made. I will be offering to meet them to discuss the detail of the reforms now being introduced.

I come to the issues of policy. As the CAB report states, tax credits are the best way to deal with society's responsibility to help with the costs of bringing up children and tackling child poverty. The background both to the introduction of tax credits and to the reports out today is that more people than ever before are receiving tax credits to help with the costs of bringing up their children. In total, more than 6 million families—about 20 million people, including 10 million children—benefit from tax credits. Four in 10 families pay no net tax as a result of tax credits, and the take-up in the first year exceeds 80 per cent.—so in each of our constituencies, nearly 10,000 families, on average, are benefiting.

As a result of an economy where people move between jobs more often and their circumstances change more quickly, the challenge is to adjust child tax credits to changing income patterns as quickly as possible. In fact, 3 million people now change jobs every year, and their    income changes are often substantial. Some 700,000 children are born every year and receive different rates of child tax credit, according to their families' circumstances.
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The fast-changing nature of the economy is such that around 300,000 people who receive tax credits experience very large changes in their family income—£10,000, or more, during a year. In introducing the child tax credit, the big change that we made was to move from a fixed payment based on past income, not on actual income, which was recognised as unresponsive to families' changing circumstances and therefore unfair.

When the new system was introduced, we decided that, during the year, we would be prepared to adjust tax credits to changes in family circumstances. So the issue for the Government and, indeed, for all parties that want to comment on these issues in the House and beyond is whether we return to a fixed system, which is clearly unfair and does not adjust for changes in family income during the year; whether we operate a system whereby we compensate people when their income falls, but do not adjust credits downwards when their income rises, even when it rises substantially by £10,000 a year or more; or whether we retain the principle of getting the balance right between taxpayers and individual family circumstances.

I have always been happy to listen to and to take note of the views of all parties on these issues, but I have to tell the House that, when we consulted widely before the implementation of the tax credit, the overwhelming consensus was that a balance should be struck between the needs of the taxpayer and those of the families who claim and that the system should adjust to any drop in income and therefore compensate the claimant in full and only respond to increases in family income during the year, when the family income increases by £2,500 or more a year. I also have to tell the House that, when these issues were voted on in the House, there was a clear majority in favour of these proposals.

Of course, I will continue to keep the House fully updated on recent developments in the tax credit system, as I have endeavoured to do in debates and statements in the past. The ombudsman makes reference in her report to a small part of one sentence of one written answer and suggests that it offers an incomplete picture. I have repeatedly answered questions on this issue. Indeed, in a debate on 26 January, I told the House that there had been problems going back to the introduction of the computer system.

More recently, I issued a statement on 26 May, setting out the situation, the action that has been taken and what more we will do to improve the system. There was an Adjournment debate on 7 June at which I responded to many of the issues raised by hon. Members and, again, outlined the changes. And I will, of course, keep the House updated on the reforms that we are putting in place to improve the system and report back on my discussions with voluntary and community sector organisations.

Mr. George Osborne (Tatton) (Con): The reports today from the parliamentary ombudsman and the CAB paint a devastating picture of the administrative chaos, computer errors and political misjudgments at the heart of the tax credit system. The response of the Paymaster General today—that she made a written statement a month ago and replied to an Adjournment debate in the House—is not enough, as the CAB makes clear in its report today, not least because some of the changes that the right hon. Lady was talking about may
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be 18 months away. That is not good enough for a system that is supposed to help low-income families, but in the words of the CAB has

Does the Paymaster General agree with the CAB about that?

Does the right hon. Lady agree with the ombudsman, who said today that many families


Mr. Speaker: Order. The hon. Member for Blyth Valley (Mr. Campbell) should not shout across the Chamber. I know that he does that regularly but he should not be doing it just now.

Mr. Osborne: Thank you very much, Mr. Speaker. I was merely quoting from the ombudsman. It would be interesting to know whether the hon. Member for Blyth Valley (Mr. Campbell), who may make a contribution later, agrees with the ombudsman and the CAB.

The Paymaster General expresses regret for the mistakes that have been made, but she said this morning that for a huge majority of families the system is working. But will she confirm that, of the 6 million families receiving tax credits in 2003–04, 1.9 million were overpaid almost £2 billion and that a further 713,000 were underpaid half a billion pounds. That is more than a third of all the families claiming tax credit, so how on earth can she say that the system is working well for a huge majority of families? How can she say that when in her own constituency in Bristol almost half the 9,200 people who claimed tax credit received an incorrect amount and the taxpayer has had to pay out £3.7 million in her constituency alone in overpayments?

I have five specific questions about the future operation of the system. First, the ombudsman says that from the evidence she has seen the Revenue has yet to adopt a model for dealing with low-income families that takes full account both of the complexities of tax credits and of the vulnerabilities of their lives. Does the Paymaster General agree with that key recommendation of the report? Indeed, will she introduce a human face in the system so that judgments about clawing back overpayments are made by an individual, not a computer?

Secondly, will the right hon. Lady accept the recommendations in the report that families should be made aware of what is happening to their credits, told how they can appeal and informed about the hardship payments available to them, not because they go to their local MP or CAB but as a matter of right, as part of the tax credit system?

Thirdly, will the Paymaster General consider writing off all excess and overpayments caused by official error, not just in the past but as part of the system, so that Ministers do not have to come to the House announcing amnesties every year? She should make that part of the system so that low-income families do not suffer due to the Treasury's mistakes.
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Fourthly, will the right hon. Lady suspend with immediate effect plans to move a further 800,000 of the lowest income families who currently receive their tax credits from Jobcentre Plus to the Treasury's chaotic systems? My right hon. and learned Friend the Leader of the Opposition specifically asked the Prime Minister about that point; he did not respond, but it is of enormous interest to every MP. Will the Paymaster General respond and make it clear that she will delay the migration of those 800,000 people to the Revenue until the problems are sorted out?

Fifthly, I turn to the Paymaster General's accountability to the House of Commons. On 7 February, she said of the tax credit system:

Yet the ombudsman says that

Is the right hon. Lady saying that the ombudsman is wrong? She did not say that in her statement but if that is so she should say it in her response to me.

Finally, will the Chancellor, who dreamt up the tax credit system, with all its complexities, respond to what the ombudsman calls

The ombudsman says that needs "very careful consideration" by Parliament and the Government. Is not it time that the Chancellor responded to what the ombudsman said today by setting up a far-reaching independent review of tax credits?

The chaotic system of tax credits is having a devastating impact on the lives of some of Britain's poorest families. Do not they and Britain deserve better?

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