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Mr. Timms: My hon. Friend is right on both points. Yesterday, the Treasury Committee made the point that
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its witnesses have not called for a return to a less flexible system, although some hon. Members have done so.

The statistics published at the end of last month showed continued growth in the number of tax credit recipients. The total number of families who benefit from tax credit rose to 5.9 million in 2004-05, and 305,000 families have benefited from the child care element alone—a 14 per cent. increase on the previous year. A total of 79,000 families benefit from the disabled worker element, which represents an increase of 23 per cent. on 2003-04. Tax credits, as my hon. Friend rightly said, make a vital contribution to the well-being of hard-working families in Britain today. As the Treasury Committee said yesterday, they are right in principle. The challenge is to make sure that the administrative problems that have been raised in our debate are put right.

Mr. David Laws (Yeovil) (LD): So that we can move on to the substance of the debate, can the Chief Secretary tell us how many recommendations made a year ago by the ombudsman have been implemented?

Mr. Timms: We responded positively to the ombudsman’s report, and we have not rejected any of its recommendations. The hon. Gentleman will have seen our response, as it has been published.

A good deal of the debate concerns end-of-year adjustments, which were raised by my hon. Friend the Member for West Bromwich, West (Mr. Bailey). Let me make the position clear: as family circumstances change, we must reflect those changes in the tax credits that are paid, which is why end-of-year adjustments are integral to a flexible system that responds to people’s changing needs. For example, if a couple have a second child or if they suffer a sudden drop in income, the tax credit system should be able respond with extra help straight away. That is the great strength of the flexible system that has been set up, and such a response is only possible if payments can be adjusted during the year and, where necessary, at the end of the year, once any changes in income are known.

Mr. George Osborne: The Treasury Committee said in its final recommendation:

Will the Chief Secretary confirm that that is the case?

Mr. Timms: The hon. Member for Yeovil (Mr. Laws), in particular, has called for the introduction of a system based on income in a previous period. He is right that the need for adjustments would be removed if we did so, but he and the House must acknowledge the price that would be paid is a loss of flexibility. Interestingly, the report published yesterday included a suggestion, based on work by the Economic and Social Research Council centre for analysis of social exclusion, that, if anything, the system should be more flexible in future.

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Mr. George Osborne: The Chief Secretary told us the views of the hon. Member for Yeovil (Mr. Laws), but I asked for the views of the Chancellor of the Exchequer who, we are told,

Is that the case?

Mr. Timms: We certainly keep the system under review, but its flexibility is a source of enormous strength and benefit. It can respond straight away to changes in people’s circumstances, which is a huge gain.

Mr. Weir: I agree that flexibility is essential to the system, but if my constituents try to provide information to officers, it is often not entered into the system or is not entered correctly so it cannot be found if there is a problem. This week, I received a letter from Revenue and Customs saying that it could not retrieve information from the system to tell me whether my constituent had been overpaid, underpaid or paid the correct amount. My constituent is beside herself with worry—there is a problem in the system, as it cannot deal with flexibility.

Mr. Timms: I was pleased to discuss the improvements that we have made in a recent Adjournment debate, when the hon. Gentleman raised his concerns. Procedures are in place to minimise hardship, including reduced recovery rates from continuing tax credit payments for people on low incomes. For people who no longer receive an award, there are 12-month instalment plans, with longer repayments where necessary. Her Majesty’s Revenue and Customs considers the case for making additional payments to people who claim hardship as a result of recovery. My right hon. Friend the Paymaster General listened to representations last year about the balance between certainty and flexibility, and responded with changes that reflected those representations.

We do need to improve the quality of service to tax credit customers, as the Treasury Committee stated. That is why we have introduced a series of changes building on experience from the first couple of years of the system. I am grateful, again, to the Treasury Committee for its acknowledgement yesterday:

Mr. McFall: On the point made by the shadow Chancellor—yes, the Chancellor is keeping an open mind, but I have tried to impress upon the Chancellor and other members of the Front-Bench team that if we go back to a fixed system, we can be sure that, as my right hon. Friend the Member for Birkenhead (Mr. Field) said, there will be many, many more complaints from our constituents. The question is flexible or fixed, and I am looking for an answer from the shadow Chancellor. We must be sure that a flexible system works. That is why we need to keep an eye on it.

Mr. Timms: That is why the Liberal Democrat Front-Bench spokesman’s predecessor said that

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The Liberal Democrats had previously favoured flexibility. My right hon. Friend is right about the benefits of that.

Mr. George Mudie (Leeds, East) (Lab): As a member of the Select Committee, I appreciate the open mind that my hon. Friend is bringing to the problems that were thrown up. They are not easy problems to resolve, but the fact that they are accepted and that work is going on is welcomed. However, seeing the problems should not distract us from the effect that tax credits have had on our estates. I have seen so many young people waste away on benefits, particularly single parents, who should be in a job but whose lack of skills means that their first job will be a low-paid one, which does not make it worth their while coming off benefits. Tax credits—my hon. Friend mentioned the figure of £50 to £76 a week—have provided the incentive for so many people on my estate to take up work, enter society and be a stakeholder for the first time.

Mr. Timms: My hon. Friend is absolutely right. The dramatic improvement to the incentives to get into a job have been a big gain from the system. I am grateful to him for drawing the attention of the House to the gains in his constituency, and I pay tribute to his work on behalf of his constituents in that respect. That is why the Select Committee said yesterday that we could not go further on certainty without putting flexibility at risk. That was an interesting conclusion, which the House will want to reflect on.

My right hon. Friend announced some important policy changes last November, in particular to address the impact of the annual income rises that have led to the need for adjustment and an increase in the tax credits disregard from £2,500 to £25,000. That crucial change has taken effect from April this year. Together with other changes, those policies will minimise the need for adjustments, yet maintain the flexibility to respond to changes in circumstances.

Greg Clark (Tunbridge Wells) (Con): On the increased disregard, can the Chief Secretary say what estimates his officials gave Ministers of the cost of that policy change?

Mr. Timms: The overall impact of the package is broadly neutral in cost terms. When one considers the elements of it that cost money and those that gain revenue, the overall impact is broadly neutral.

In our modern labour market, where in any year 3 million people change jobs, flexibility to respond is tremendously important. That is the big benefit of the system as it has been constructed. I welcome the Treasury Committee’s comments about that.

Our strategy is to make work pay and to provide real financial support to families through tax credits. There have been problems in the early stages of implementation, but there have also been vital gains. That is why there is growing recognition—across the House, I hope—that tax credits are right in principle.

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Mr. George Osborne: I am grateful to the Chief Secretary for giving way again. I sense that he is winding up. Will he deal with two specific points, which I know the Select Committee considered and Citizens Advice is concerned about? One is the statutory test and the right to appeal to an independent tribunal, which exists for other benefits. The second is the pause that the Government promised before the clawback of overpayments, to give people the right to question the Treasury’s decision on that.

Mr. Timms: On the first point, the procedure as we now have it is consistent between the tax credit system and the benefits system as regards the handling of official error. As the hon. Gentleman knows, I have just come from the Department for Work and Pensions, and there is consistency now between those two. On the pause, we have said that we want to accept the ombudsman’s recommendation. I can reaffirm that today. Some IT changes will be needed to achieve that, and they may take a little time. We want to take the time, to make sure we get it right. It is our intention to proceed with that, as we have said.

Better incentives for work, a lower tax take from families on low and middle incomes, a big reduction in the number of children growing up in poverty—the system is right not just in principle, but increasingly in practice as well. It is the right system for a progressive welfare state and for a fair and prosperous Britain.

2.35 pm

Mr. David Laws (Yeovil) (LD): As the Front-Bench speakers for the Conservative party and for the Government observed, this is a timely moment to consider tax credits and the future of the system. Not only do we have the figures that were published last week on the 2004-05 performance of the tax credit system, but we have the excellent report from the Treasury Committee, which throws a great deal of light on the salient issues that we shall discuss today, many of which were glossed over in the Chief Secretary’s response. I hope that the Paymaster General will be able to say more when she sums up.

I welcome the Chief Secretary to his new responsibilities and am glad to see that he is taking a leading role in tax credits policy. Indeed, he seems to have been taking the lead role over the past week as the Government dealt with the implications of last week’s figures.

I had not spotted the statistics that the shadow Chancellor drew to our attention, which indicate that in the Chief Secretary’s constituency there are greater problems with the tax credit system than anywhere else in the country. I hope that that will ensure that there is a stronger spokesman in the Treasury than there has been in the past for the interests of those who have been failed by the system and who are looking for reforms, rather than complacency, from the Government.

There are two aspects of tax credits that we must debate today. The first group of issues are those on which the Select Committee commented in its excellent report, concerning the practicalities of the tax credit system, with its existing broad design. The parliamentary ombudsman commented on many of
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those in her report a year ago. The Chief Secretary said that the Government accepted all the ombudsman’s recommendations, but he failed to say which had been implemented to date, and he is surely wrong to say that the Government accept all the recommendations. I thought it had already been made clear by the Paymaster General that the Government did not accept the ombudsman’s most important recommendation, No. 10, which was to write off the overpayments that have occurred in the past owing to official error. Perhaps the Paymaster General can put on the record later whether the Government’s position on that has changed.

Philip Davies (Shipley) (Con): The hon. Gentleman hits upon something that affects one of my constituents, Susan Webster, who is in a distressing situation. She made Revenue and Customs aware each time her circumstances changed, as HMRC has confirmed to me on its hotline, yet she still had an overpayment of £1,000, which she is expected to pay back. Revenue and Customs refuses to write off that sum. Surely it is wrong, when someone makes HMRC aware of changes in their circumstances at the right time, that they are still expected to pay back a considerable amount of money.

Mr. Laws: The hon. Gentleman makes an excellent point. He draws to our attention the fact that the Government have been in denial about the problems of tax credits ever since the system was established, and they have maintained from the beginning—it is picked up in the Treasury Committee’s report—that all the problems that people have faced with tax credits have been due to their own incompetence in dealing with the system. In fact, most of the people I have seen in my advice centres in my constituency—I must have seen 250 to 300 over the past two years—have faced problems that were caused in some way by official error. That is what the Government have neither acknowledged nor dealt with in the design of the system.

Mr. Roger Gale (North Thanet) (Con): Does the hon. Gentleman recall the Prime Minister standing at the Dispatch Box at Prime Minister’s Question Time and saying that the Government would not seek to reclaim money in any case where the error was shown to be on the part of Her Majesty’s Revenue and Customs? Does he agree that the Government are quite simply in breach of that undertaking?

Mr. Laws: The hon. Gentleman is quite right that the Prime Minister made a commitment that the Government have not kept. Indeed, it was a commitment that the Chancellor of the Exchequer repeated on GMTV. But our constituents have found themselves in a double lock where they have not only to demonstrate that there was error by HMRC, but to demonstrate by a very strict standard that they could not have been aware of those particular problems.

Mr. Weir: Will the hon. Gentleman give way?

Mr. Laws: I shall make a little progress and then give way.

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The Chief Secretary dealt with some of the successes of the tax credit system, and 17 of the 18 lines of the Government’s amendment trumpet its successes. Every hon. Member today has acknowledged that for many people, tax credits have made an enormous difference. It would have been almost unbelievable that a Government could spend £15.8 billion in a single year on means-tested benefits without benefiting anybody. The issue is that the design of the tax credits system has been fundamentally flawed, that overpayments are fundamental to the system and that they have driven into poverty many of the people whom the Government have sought to help most, as has been shown by not only the Select Committee’s report, but the ombudsman’s report, which has been sitting on the shelf for the best part of a year.

The Chief Secretary and the Paymaster General would do well to read the leader article in the Financial Times last week on the day on which the Government published the latest statistics, in which the leader writer said:

One of the greatest disappointments in terms of the Government’s response over the past year, and to some extent even the Chief Secretary’s response today, is that there has been an arrogance and an unwillingness to accept the problems that have been created for many people on the lowest incomes throughout the country.

The problems of the tax credits system, in terms of the loss of public money and the enormous overpayments that have had to be recovered from people on low incomes, are already well known. Many hon. Members today have already spoken, and I am sure others will later, of their own experiences of dealing with the individuals who have had these problems, many of whom have never been significantly in debt before, are baffled by the complexity of the system, and have got into these enormous debts and overpayments through no fault of their own. It is on those practical issues that I seek some reassurance from the Government today.

Mr. Timms: The hon. Gentleman’s main proposal is the reintroduction of a much less flexible system, like the old family credit system based on fixed awards. He will have seen what the Treasury Committee said about that yesterday. I quote:

Indeed the hon. Gentleman’s predecessor in his current post explicitly supported the ability of the system to be flexible in the way that it is. Does that give the hon. Gentleman any pause to reflect on the merits of the proposal that he has been running with for some time now.

Mr. Laws: I find the Government’s position on this issue rather difficult to fathom. The Chief Secretary has said a number of times that the fixed system would have terrible disadvantages and that it would be some
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kind of disaster, and that was the line that the Paymaster General used to take. But at the same time they have acknowledged to the shadow Chancellor that they are considering precisely such an option and that they are keeping it under review. I remember being in this House a year ago and hearing the Paymaster General tell us how the alternatives to the then system were ridiculous; that a fixed award system would be ludicrous and that increasing the disregard to the outrageous figure of £10,000 would be enormously expensive. Yet a few months later the disregard went up from £2,500 to £25,000. The Chief Secretary would do well to acknowledge that in paragraph 52 of their report, members of the Select Committee say that they had not sought in this inquiry

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