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Mr. McFall: Given that I have given way to a former member of the Treasury Committee who does not know what he is talking about, I should like to give way to a current member of the Treasury Committee in the hope that she knows what she is talking about.
We agree that the policy underpinning tax credits of taking people, and especially children, out of poverty is laudable, and that the programme has had considerable success.
are encouraged to hear that they are providing financial assistance to so many people, especially families with children.
Tax credits have succeeded... in achieving a significantly higher rate of take-up than was the case under previous regimes.
The tax credit system has three overriding objectives. The first is the increase in support for families, the second is the decrease in child poverty figures and the third is providing an adequate incentive to work.
We welcome the close attention that the Government continues to pay to improving the design of the regime, as evidenced by the package of reforms announced in the PBR 2005.
Mr. McFall: I thank my hon. Friend but he knows that, as Chairman, I am here to provide objectivity and to reflect the comprehensive nature of the report. I have not once been criticised by members of Opposition parties about that.
we are not convinced that the Paymaster General and the Department fully realise the extent to which HMRC needs to re-focus its administrative structures for tax credits around the needs of claimants.
On increasing support for families, we now have 20 million people getting support, as the Paymaster General said, involving 6 million families and 10 million children. That is an increase on the results of every past policy, and the take-up rate among low earners has been 93 per cent. That is a big improvement compared with the take-up rates of 57 per cent. in the early years of family income supplement, of 62 per cent. for family credit and of 65 per cent. for working families tax credit. That is why the Select Committee has endorsed this policy.
The Select Committee also endorses the child poverty objectives that have resulted in 700,000 children being lifted out of relative poverty, and the measures on creating adequate financial incentives to work. The Chief Secretary to the Treasury mentioned the tax burden. Like him, I look to the survey carried out by the Organisation for Economic Co-operation and Development, which showed that, as a result of the tax credit, there had been a large fall in the tax burden for families. The tax burden on a single-earner couple with no children earning £21,000 has fallen from 17.3 per cent. of gross earnings in 1997 to 9.8 per cent. in 2004. That is the lowest rate for any G7 country, and it is indeed an incentive for people to get into work. The effect of the policy on children is also important, and the Select Committee report notes that the tax credit has helped to ensure that the number of families with children paying no net tax has risen from under 2.5 million to more than 3 million in 2006-07. That is a considerable improvement.
However, I must ask whether everything is going right with the regime, and the answer is most definitely no. That is why the Treasury Committee has sought to address a number of points. Is the regime fit for purpose? Yes, in terms of the majority of people getting tax credits. However, it is not fit for purpose for the minority of people having problems with the tax credit system. That is why the Select Committee visited the tax credit office in Preston, where we looked at the way in which the regime was working in practice. Overpayments were a big issue there.
We examined the problem of overpayments, and the staff gave us three reasons for it. The first is that peoples incomes rise from one year to the next. The second is that families overestimate the extent to which their income has fallen. The third is that the provision of payments at the start of a tax year might be based on out-of-date information. Those three reasons combined account for 70 per cent. of the overpayments. I would like to think that the Select Committee has performed a service in identifying those three issues so that they can be tackled. The Select Committee also noted that 30 per cent. of the overpayments were due to delays in reporting changes in a familys circumstances.
The Conservative and Liberal Democrat spokesmen both mentioned the arguments for either fixed or
flexible systems, and I would like to say to the hon. Member for Yeovil (Mr. Laws) that that subject was very much a feature of the Committees discussions. My right hon. Friend the Member for Birkenhead (Mr. Field) gave oral evidence to the Committee in which he said that he was getting fewer complaints at his surgeries about tax credits now. I have also taken anecdotal evidence on this, and that is certainly a feature of what hon. Members tell me more widely.
If we were to go back to a fixed system, hon. Members would have an increasing number of people coming to see us about the problems involved. I would also like to point out to the Chief Secretary to the Treasury that if we returned to a fixed system, we would not be responding to the demands of a modern labour market. That is important because 3 million people change jobs every year in a modern labour market, and each year more than 200,000 move into new or better jobs, resulting in an increase in their family income by £10,000 a year or more.
Those are the reasons for the overpayments. I cannot stress strongly enough that, if we are to have a flexible system, overpayments will be a feature of it. So how can we manage this in a client-sensitive manner? I might be departing from what the Select Committee has said on this, but my experience is that the benefits of a flexible system are there for everyone in the family.
Jim Cousins: Will my right hon. Friend comment on paragraph 30 of the reports conclusions and recommendations? The Select Committee makes it clear that, if we are to have a system with the flexibility that he described, it will not be reasonable to expect to achieve staff reductions. In fact, the number of people being employed to achieve a more flexible system is growing, and that pattern is likely to continue. We will not be able to achieve staff reductions if we want to achieve flexibility.
Mr. McFall: That is a very good point. That issue was raised with us at the tax credit office in Preston. As a result of the demands on the office, extra members of staff were being drafted into that area. When the Minister and others look at the Gershon reviews, and at the demands that have been made on the Department already, they should keep this issue up front. We realise that this cannot be fixed overnight; it will take time. I will mention some of the problems involved as I go through my speech. However, it is an issue that we can all tackle constructively.
I know that the Chancellor has an open mind about this system. The media and others focus on the fact that there have been £2 billion of overpayments this year. That equates in the publics mind to £2 billion of losses, but that is not the case. However, it does give the impression that the system is running less than smoothly. So perhaps the Chancellor will anticipate that reaction and say, Okay, well go back to a fixed system. It will be a surer system. But will it serve the interests of our constituents? I do not think so.
Does the right hon. Gentleman accept that this is not just an issue of presentational embarrassment for the Government or lost money for the taxpayer? It is also a fact that many of the
overpayments are being recovered from people on extremely low incomes, sometimes when the problem has arisen through official error rather than their own. That is an even bigger problem than the fact that the Government have paid out £2 billion more than they intended.
Mr. McFall: The hon. Gentleman must accept that overpayments are an inherent part of a flexible system. But how can we marry such a system with a client-sensitive system? The Select Committee had that discussion with members of the unions and officials in Preston when we visited the tax credit office there, and that is the important issue for them.
The overpayments were £2.2 billion in 2004-05 and £1.8 billion in 2005-06, and I hope that the Paymaster General will respond to this point when she winds up the debate. A breakdown is needed of those overpayments to determine what the Governments figures are. The figure of £4 billion over two years needs to be broken down.
Mr. Philip Dunne (Ludlow) (Con): Does the right hon. Gentleman agree that this is not just about the overall amount of money involved? It is also about the number of people involved. He referred to a minority who had received overpayments, but we heard from the shadow Chancellor earlier that, in many constituencies, nearly 50 per cent. of those entitled to payments are either being underpaid or overpaid. I have just worked out that, in my constituency, 47 per cent. are getting the wrong payment. Given the administrative nightmare that is taking place in HMRC, the impact on peoples lives of having to deal with this problem is getting them very upset, and we have to spend all our time dealing with that. Solving the problem of administrative incompetence is absolutely critical to getting this matter right.
Mr. McFall: As I said earlier, overpayments are an integral part of the system, but it is necessary to distinguish between individuals who can make an adequate response to the tax credit office about overpayments and thoseperhaps people on low incomes and in distresswho cannot. However, I agree with the hon. Gentlemans second point.
Mr. Weir: I understand what the right hon. Gentleman is saying, but does he not accept that, as many other Members have pointed out, some people who recognise that they have been overpaid find it difficult to persuade Her Majesty's Revenue and Customs that they have been overpaid? That prevents the problem from being sorted out earlier.
Rob Marris :
My right hon. Friend is doing a great job in drawing out what I perceive as a consensus, evidenced by the last two interventions. The consensus on both sides of the House seems to be that tax credits are a good thing and are doing a great deal to alleviate poverty, and that there are administrative teething problems. The only difference now seems to concern
the magnitude of the problems, and how far the Government have gone towards addressing them. The overpayment figures for two years that my right hon. Friend has given show that they are moving in the right direction. If the Opposition would be a little more flexible, we could have consensus on that. There are problems, which are being fixed. It will take more effort to fix them further.
End-of-year adjustments feature in any flexible system. The only way in which to eliminate overpayments is to have a fixed system in which eligibility is based on the previous years income and circumstances, and I certainly do not want to go down that road.
The Treasury Committee said that there should be a shift in the culture of HMRC if the tax credits system was to be a success. HMRC conducted a review of the merger of the two departments, which the Select Committee recommended to the Government. As has been pointed out, there are two entirely different cultures, and the client-centred culture has not been predominant. That must be addressed, and I hope that David Varney, HMRCs chief executive, and his colleagues will read the report with that constructive criticism in mind.
I should like the Paymaster General to think about what the Committee said about official error. The Committee believes that it has been a cause of overpayments in a significant number of cases, and that the Government should publish a complete analysis of incidences. There are also the errors caused by the IT system, which a number of Members have mentioned. Constituents have come to me about it. After our visit to Preston, the reason is obvious to us. When a client telephones a civil servant who then consults a computer, not all the information on the client will be on that computer. If decisions are being made on the basis of incomplete information, we can be sure that the system will be made worse. The IT problem must be addressed as a matter of urgency.
When we visited Preston, we learned that only about 25 per cent. of claims went straight through the automated system with no need for manual intervention. About 80 per cent. of new claims required intervention, and it was required by about 30 to 35 per cent. of claims for renewal. The Public and Commercial Services Union told us that the Government initially intended the rapid data capture processthe conversion of written information from application forms into electronic datato handle about 90 per cent. of claims without further need for human intervention. My hon. Friend the Member for Newcastle upon Tyne, Central (Jim Cousins) mentioned staff numbers, and those figures make his point. There is an urgent need to keep staff at the tax credit office.
A recurring theme was the IT systems lack of flexibility, and the difficulty of correcting a mistake once it had been entered into the system. Staff mayas
they told usaccept that the information is wrong, but may still be unable to correct the error.
The Committee also referred to fraud, error and organised crime. When the Paymaster General appeared before the Committee, I personally interrogated her on issues relating to staff from the Department of Work and Pensions and from Network Rail. HMRC has closed the e-portal and it feels that the fraud issue can be addressed, but there is still a problem over national insurance numbers. Vigilance is needed.
Mr. Mudie: Perhaps it is wrong to raise this when my right hon. Friend is talking about fraud, but I think we should record the problems that the Committee had with Electronic Data Systems. We were not able to confirm that we could discuss the matter with the Minister, because we were bound by a settlement. The Public Accounts Committee has raised the issue, and it has been raised by us. I think it should be put on record that the settlement with EDS is insupportablethat it is quite wrong, requires investigation, and should never be replicated.
Mr. McFall: My hon. Friend makes a good point. I remind the Paymaster General that David Varney, the HMRC chief executive, contacted us and offered us a confidential briefing. However, that would naturally have meant that we could not open our mouths at any future date. As politicians and public representatives, we were not prepared to enter into any such negotiation.
There is a credibility problem. There is, perhaps, a perception of impropriety. There may have been no impropriety, but the position is far from satisfactory, and my hon. Friend the Member for Leeds, East (Mr. Mudie) has done us a service by referring to it.
The Committee welcomed the increase in disregard from £2,500 to £25,000, but the Government say that they expect the increase to reduce the current level of overpayments by a third. That suggests that the remaining two thirds of overpayments arise as a result of changes in claimants circumstances other than increases in income. Consequently, over the next few yearsalthough the tax credits regime may see a decrease in the number of overpaymentslevels are likely to continue to be high. At the same time, claimants problems may well become increasingly complex as their case histories within the regime lengthen. I should like the Paymaster General to examine that issue, as well the important issues of the pause and the referral to an independent tribunal for appeal. We have mentioned both those issues.
Ms Keeble: On the independent tribunal appeal, does my right hon. Friend agree that it is important that we see the report first, as the Treasury Committee suggests, so that we can determine the practicality of having an independent appeal system, which is what we recommended?
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