House of Commons portcullis
House of Commons
Session 2005 - 06
Publications on the internet
Standing Committee Debates

Draft Tax Credits Up-rating Regulations 2006

Column Number: 1

Third Standing Committee on Delegated Legislation

The Committee consisted of the following Members:


Mr. Eric Illsley

†Austin, Mr. Ian (Dudley, North) (Lab)
†Banks, Gordon (Ochil and South Perthshire) (Lab)
†Breed, Mr. Colin (South-East Cornwall) (LD)
Cable, Dr. Vincent (Twickenham) (LD)
†Dorries, Mrs. Nadine (Mid-Bedfordshire) (Con)
†Foster, Mr. Michael (Worcester) (Lab)
†Francois, Mr. Mark (Rayleigh) (Con)
†Gauke, Mr. David (South-West Hertfordshire) (Con)
†Hillier, Meg (Hackney, South and Shoreditch) (Lab/Co-op)
†Miliband, Edward (Doncaster, North) (Lab)
†Mountford, Kali (Colne Valley) (Lab)
†Primarolo, Dawn (Paymaster General)
†Reed, Mr. Andy (Loughborough) (Lab/Co-op)
†Selous, Andrew (South-West Bedfordshire) (Con)
†Simon, Mr. Siôn (Birmingham, Erdington) (Lab)
Viggers, Peter (Gosport) (Con)
†Watson, Mr. Tom (Lord Commissioner of Her Majesty’s Treasury)
Alan Sandall, Committee Clerk

† attended the Committee

The following also attended, pursuant to Standing Order No. 118(2):

Gale, Mr. Roger (North Thanet) (Con)
Newmark, Mr. Brooks (Braintree) (Con)
Marris, Rob (Wolverhampton, South-West) (Lab)

Column Number: 3

Monday 20 March 2006

[Mr. Eric Illsley in the Chair]

Draft Tax Credits Up-rating Regulations 2006

4.30 pm

The Paymaster General (Dawn Primarolo): I beg to move,

    That the Committee has considered the draft Tax Credits Up-rating Regulations 2006.

How nice to see you, Mr. Illsley; I am sure that you will keep us in order.

The regulations are compatible with the European convention on human rights. Tax credits play a major role in ensuring that work pays, and in helping people to move up the employment ladder. Together with child benefit, they deliver financial support to the vast majority of families with children, and they are vital in our commitment to tackling child poverty. I am therefore pleased to introduce the regulations, which increase certain elements and thresholds of tax credits.

The child element of child tax credit will rise to £1,765 a year from 6 April 2006, an increase in line with earnings of £75. It has increased by almost £320 since its introduction in April 2003, and it benefits 6.7 million children. In addition, the regulations increase the disabled child elements of child tax credit in line with inflation. Elements of working tax credit will also increase in line with inflation. It provides support to low-income working families, including people who do not have children.

The tax credit system has been designed to offer support to people as they move between jobs and as their circumstances change. Building on the lessons from the first two years of tax credits, the pre-Budget report announced a package of measures to improve the system. Those measures will ensure that the system strikes the right balance between providing a stable award and maintaining the ability to respond to changes.

To reflect changes in annual income, tax credit awards can be revised during the tax year, and they are finalised at the end of the tax year. Currently, the first £2,500 of any rise in annual income is disregarded. However, incomes have been much more volatile than expected, with short-term fluctuations making it difficult for people to give an accurate estimate of annual income. The regulations therefore increase the disregard for income rises to £25,000. That will ensure, for almost all families, that a rise in income will not lead to a fall in tax credit entitlement in the first year of the rise.

The pre-Budget report package has been widely welcomed—for example, by Citizens Advice, One Parent Families and the Child Poverty Action Group.

Column Number: 4

Mr. Mark Francois (Rayleigh) (Con): Will the Paymaster-General give way?

Dawn Primarolo: No, I am about to conclude.

More than 5.9 million families, with 9.9 million children, benefit from tax credits. With the increases brought about by the regulations, we will be delivering even more support next year. We remain committed to our long-term aim of eliminating child poverty within a generation, and halving it by 2010. Tax credits remain a key part of that. I commend the regulations to the Committee.

4.33 pm

Mr. Francois: It is a pleasure, Mr. Illsley, to serve under your chairmanship. It is a pleasure also to be here opposite the Paymaster General. We have debated the tax credit system one way or another on a number of occasions, and I am happy, as I am sure she must be, to renew our acquaintance on the subject this afternoon.

The system has been controversial since its introduction. Some 2 million families have been pursued for overpayments. The system has been criticised by a variety of organisations, including the Public Accounts Committee and the Parliamentary Commissioner for Administration. The Paymaster General will be well aware that, for some time, we have been calling for the system to be reformed.

In that context, our purpose this afternoon is to consider the relevance of the latest changes to the tax credit system, including those announced in the pre-Budget report in December 2005. As the explanatory notes point out:

    “These regulations increase, from 6 April 2006, various monetary elements and thresholds within the Child and Working Tax Credits, as set out in the Pre-Budget report on 5th December 2005.”

In particular, the regulations give effect to the 10-fold increase in the income disregard from £2,500 to £25,000. That is a somewhat controversial measure to which I shall return in a moment.

I want to ask the Paymaster General a couple of technical questions. Section 41 of the Tax Credits Act 2002 stipulates that every year the Government will produce a report to Parliament on the operation of the system and on what would happen if the various allowances under tax credits, which are numerous, were uprated in line with prices. First, can the Paymaster General tell the Committee whether the retail prices index or the consumer prices index was used for the basis of the calculations? What was the rationale for the one that was chosen? Secondly, four of the items in the list show no increase: the family element normal; the family element baby addition; the working tax credit first income threshold; and the child tax credit first income threshold. There are several other increases broadly in line with prices in the report, but for some reason the Government have not increased those four items and have left the figures as they were. Perhaps the right hon. Lady will explain why.

Column Number: 5

The changes in the pre-Budget report were announced as a package, which was designed to improve the overall administration of the tax credit system. I do not propose to repeat the whole package this afternoon, as it is rather lengthy, as the Paymaster General will testify, but some of the key highlights include the following: more accurate and easy-to-read award statements, which obviously we welcome;—[Hon. Members: “Hear, hear.”] Labour Members are slow, but they get there eventually—earlier reporting of changes in household circumstances by those claiming tax credits, to which I will return; and the 10-fold increase in the disregard itself. However, even those changes will do little to affect three key operational problems with the system. The first is the unreliability of the computer system that backs up the whole tax credits mechanism. That computer will have to incorporate the increases in the regulations. The computer is unfortunately prone to errors, which include sending tax-credit claimants completely contradictory letters about the value of their credits, even on the same day.

Mr. Siôn Simon (Birmingham, Erdington) (Lab): No!

Mr. Francois: Indeed. That was demonstrated by the fact that the Government sacked their original IT contractor and have now appointed an alternative firm to try to sort out the mess.

Mr. Ian Austin (Dudley, North) (Lab): This is a history lesson.

Mr. Francois: The hon. Gentleman may say so, but it is more than that to the people who sit in my surgery in tears. I suspect that all hon. Members have had problems with the system. If hon. Members want to mock, they can, but this is a serious matter.

First, the computer that will have to accommodate the increases has fundamental weaknesses and the proposed changes will not address that problem. Secondly, the regulations will change the amount of money to which people are entitled.

Andrew Selous (South-West Bedfordshire) (Con): Is my hon. Friend aware that the Australian Government recently got rid of computer consultants on a major Government project and brought it in-house? Does he think that some of our constituents would benefit from the Treasury itself looking at these matters rather than handing them from one IT firm to another? As some Labour Members know, the Government record in this area is not particularly good.

Mr. Francois: I thank my hon. Friend. The Government sacked their existing contractor on the system. I shall not go off on a tangent and talk about all the other computer problems that have gone horribly wrong under this Government—they are legion—but referring specifically to tax credits, the Government used one firm; it went horribly wrong; they sued the firm, then sacked them and brought in another one to try to clear up the mess. The Paymaster General continues to argue that the computer is
Column Number: 6
“robust”—the phrase that she likes to use. Unfortunately, our constituents see no sign of the robustness when time and again it sends them incorrect notices. We have put on the record the point about how the computer will have to cope with the increases we are talking about.

Kali Mountford (Colne Valley) (Lab): Will the hon. Gentleman give way?

Mr. Francois: In a moment.

Secondly, the regulations will change the amounts to which people are entitled, and they will have a responsibility to inform Her Majesty’s Revenue and Customs if their circumstances change, because that could affect the amount of money to which they are entitled. Recently, the Government have been running a series of radio advertisements that encourage tax credit claimants to call the helpline and report changes in their circumstances. So they are spending taxpayers’ money to encourage people to report changes in their entitlement. However, when people ring in and offer that new information, the system is particularly bad at accepting it. A frequent example is what happens when there is a change to the composition of a household—if, for instance, a partner moves out. There are legion examples of where people have telephoned the helpline and given to the operator the details of what has happened, only then to see their payments remain unaltered until much later, even when—

Kali Mountford: Will the hon. Gentleman give way?

Mr. Francois: In a moment. That is even when people have repeatedly telephoned the helpline to try to inform HMRC of what has changed. Eventually, and usually a long while later, the system finally catches up, which usually results in a sudden demand for the reimbursement of an overpayment, but long after the family concerned has spent that money. That has been a recurrent problem. Ministers need to do more on that matter, because despite protestations the problem continues. I have personal experience of that. I had three cases in my last surgery but one of that exact problem, and I wrote to the Paymaster General about all of them. Unfortunately, the regulations do not do enough to address it. The hon. Lady has been patient and I will give way to her.

Kali Mountford: I hope that the hon. Gentleman will remind the Committee that when his party was last in government it too had computer problems. While we are on the subject of uprating, has he not had people approach him, as I have, to say that tax credits have changed their lives, enabled them to go to work and set a standard for their family that previously they could not have met? Has he never had such an experience, because I am sure that we all have?

Mr. Francois: In fairness, I have had some contact with people who have benefited from tax credits, but they have been out outweighed by the number of people who have contacted me, as a Member of Parliament, with problems—in many cases severe ones. When people come into a constituency surgery—

Column Number: 7

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

Mr. Francois: In a moment; I am answering the previous intervention.

People come into my constituency surgery with a lever-arch file full of notices—from HMRC and before that the Inland Revenue, as this issue goes back that far—of problems that they have had with the tax credit system. That is physical evidence that something has gone wrong. Somewhere in the Paymaster General’s correspondence unit she will have my three letters, and at some point I am sure that I will receive a reply.

Mr. Simon: Will the hon. Gentleman admit that it is perhaps more likely that the millions of people who have had their lives transformed by tax credits and who are extremely happy and content with them do not feel the need to go to their Member of Parliament to report their contentment, and that it is the tiny number of people who are experiencing difficulties with the implementation of a new and complicated system who visit their MP and demand the nationalisation of the computers, which I note the hon. Gentleman has so far failed to put on record as a policy of the new Cameron model army?

Mr. Francois: If the hon. Gentleman thinks that we are imagining the problems with the tax credits, could he explain to the Public Accounts Committee—[Interruption.] I am answering his question in my way. Perhaps he could explain to members of the Public Accounts Committee or the parliamentary ombudsman, who are highly critical of the system, the fact that the problems are occurring. If he thinks that I am imagining it, perhaps he could take it up with the ombudsman and the PAC.

Edward Miliband (Doncaster, North) (Lab): Will the hon. Gentleman give way?

Mr. Francois: In a moment.

The PAC and the ombudsman do not appear to be imagining it for one moment. It might be the fantasy of the hon. Member for Birmingham, Erdington (Mr. Simon) that the system is working well and without difficulty, but we know that it has severe problems. The question is what we as parliamentarians do to try to put that right. I shall come on to that, at least in a small way, in a minute. I give way to Miliband junior.

Edward Miliband: I am grateful for that gracious acceptance of my intervention. We would all acknowledge that there have been problems with the tax credit system, but does the hon. Gentleman acknowledge, just for the record, that the parliamentary ombudsman herself has said that for the majority of claimants the system had worked well? Does he agree with that assessment?

The Chairman: Before the hon. Member for Rayleigh (Mr. Francois) replies, I remind him that he may refer to hon. Members simply as hon. Members if he cannot remember their constituencies. Could I ask the rest of the Committee to calm down and to let us return to the subject of the debate?

Column Number: 8

Mr. Francois: Thank you, Mr. Illsley. I know that Labour Members are sensitive about this. I say directly to the hon. Member for Doncaster, North (Edward Miliband) that the parliamentary ombudsman said that in some respects the system was working, but she also said that in other respects there were severe problems. She gave a series of quite emotive examples of where it was not working well. To be fair, the hon. Gentleman has admitted that there are problems with the system. I am not saying that the system does not work at all, but there are severe problems with its operation. We all as parliamentarians have a duty to try to put that right. I am sure that Labour Members, although they may not want to say so in open session, have had constituents come to their surgeries or write to them about their problems with tax credits. We all know that there is a problem.

Mr. Ian Austin: Will the hon. Gentleman give way?

Mr. Francois: I will make a little progress and then I will certainly give way.

The third problem with the system is that it is extremely complicated. That is evidenced in the schedule, which shows the variety of changes, and in the section 41 report that the Government are seeking to enact this afternoon. There are a large number of allowances and sub-elements, which are not easy to understand, either for the people who are claiming tax credit or for those who are administering the system. That is a particular problem for people without financial training, which is obviously the case for many of the claimants.

That point has been made repeatedly by the Citizens Advice and other organisations. People with tax problems often go to citizens advice bureaux. Citizens Advice has told Ministers and Opposition Members about the complicated nature of the system and why that makes it that much more difficult to administer. So, there are three fundamental weaknesses in the tax credit system that somehow have to be addressed.

I turn now to the 10-fold increase in the disregard, which is probably the most contentious element of the regulations and comes under the heading “Amendment of the Income Thresholds Regulations”. Regulation 4(2) increases the income disregard in-year by a factor of 10 from £2,500 to £25,000. In other words, a family can see their income rise by that amount in-year without its affecting the amount of tax credits that they will be paid in that year. It is designed to reduce overpayments and it will do so. The Government estimate that it will reduce them by about a third. However, it is also potentially very expensive.

The Government still refuse to say how much the change will cost, despite our having pressed them on a number of occasions and even though their officials have already admitted to Parliament that they have estimated separately what the costs will be. I will back up that assertion. This really matters to ordinary people; it is not just an obtuse accounting point.

The reason is that the package of changes announced in the PBR, of which this is a key part, is ultimately supposed to be broadly revenue neutral by 2010–11. So, the bigger the cost of the income
Column Number: 9
disregard, the more that HMRC, which administers the system, will have to push to recover overpayments—which are primarily caused by factors other than income, such as changes in household composition—in order to make the books balance. In simple terms, the more that this one element costs, the harder that HMRC will have to claw back overpayments relating to other elements.

This is particularly important, because HMRC is effectively judge and jury when it comes to deciding whether overpayments have taken place. It is a different system to that of the Department for Work and Pensions. HMRC will rule on whether people have been overpaid. Obviously, if the cost of the disregard is very high, HMRC will have a strong incentive to rule, shall we say, more harshly on whether people from whom it is trying to recover overpayments for other reasons have been overpaid. So, this is very important to the families on the receiving end, which is why I am pressing the point.

Ministers have stuck to the mantra that they cannot break down the individual cost of the disregard increase because it is part of an overall package and thus too difficult to calculate. In fact, the Paymaster General stuck to this line as recently as 2 March. When I challenged her about it directly at Treasury questions, she told the House:

    “It is nonsense to try to separate the individual items because it is their interaction that produces the cost that needs to be accounted for to the House”.—[Official Report, 2 March 2006; Vol. 443, c. 396.]

That is the Government’s excuse. However, as the Minister knows well, the amount has been calculated separately by HMRC, which is exactly what one would have expected before the introduction of the changes. It would be deficient of the Treasury—of all Departments—to implement a change of this magnitude and not to know what it will cost. It is inconceivable that it would do so without having some estimate of the cost to the public finances.

We know that they know what it costs. On 14 December last year, the Public Accounts Committee took evidence from senior HMRC officials on the package of measures in the PBR, including this matter. At that hearing, under questioning from PAC members, including my hon. Friend the Member for Tunbridge Wells (Greg Clark), Mr. Paul Gray, the Deputy Chairman of HMRC, admitted that such a figure had been separately calculated. It is on the record, and if hon. Members want me to do so I will read out the exchange. Mr. Gray offered to write to the Public Accounts Committee and to provide the figure

    “in liaison with our Treasury colleagues”.

This is turning into a liaison dangereuse, because Ministers are clearly reluctant to say what the figure is, even though their officials have admitted that the figure has been calculated separately. They are asking the Committee to approve an increase as part of a statutory instrument without telling Members what it will cost. If Ministers want the Committee actively to support the change, they must tell us what it really costs. The public have a right to know, and as their elected representatives, so do we. This is a major change—it is at the heart of the PBR package—and, as
Column Number: 10
elected representatives, we have a right to know how much it will cost, particularly as HMRC has admitted that it knows what the figure is. Why do Ministers refuse to tell Parliament?

Andrew Selous: Has my hon. Friend investigated whether the Treasury is in any way in contempt of the Public Accounts Committee? The Committee has asked for this information—is there not some duty on Government to provide information to a properly constituted Committee of this House?

Mr. Francois: As I understand it, a commitment was given to provide the information to the Public Accounts Committee. Recently, I wrote to the Chairman of that Committee, encouraging him to press the point. His Committee was promised the information on behalf of the House and, therefore, deserves to get it. It is ultimately down to members of the Public Accounts Committee to pursue the issue as they see fit, but as they represent all parliamentarians, I hope that they will persist until Ministers finally cough up the figure.

There is one other point, which is an important point of policy. The Government have alleged repeatedly that my party is seeking to abolish the tax credit system. May I take this opportunity, with the Paymaster General present to hear me, to deny that. I hope that she is listening carefully. To set the record straight, and I will be brief—

The Chairman: Very brief.

Mr. Francois: Yes. We are not planning to abolish tax credits. [Hon. Members: Oh!”] Rather, we are seeking to reform the system to make it operate more efficiently in the future and to overcome exactly some of the problems that we have discussed this afternoon. That work is part of my party’s overall policy review, and we hope to come forward with proposals in the future. I hope that I have made that crystal clear.

Mr. Austin: Why, then, has the hon. Gentleman’s new leader appointed to review the tax policy the right hon. Member for Wokingham (Mr. Redwood), who said:

    “A new government should aim to simplify this system, replacing wherever possible a tax credit by a tax reduction”

which is the abolition of tax credits? Is he saying—

The Chairman: Order. The hon. Gentleman’s point is taking us outside the remit of the instrument. We should continue the debate within the terms of the regulations and not enter a wider debate about policy on tax credits.

Mr. Francois: I will take your guidance, Mr. Illsley, but what I said stands on the record and I am pleased that the Paymaster General has heard it.

Let me summarise, because I know that a number of other hon. Members are keen to speak.

Mr. Simon: Before the hon. Gentleman does so, could he be a little clearer about exactly what his
Column Number: 11
party’s policy is? We have understood that he said that we know—

The Chairman: Order. We are not entering into a debate on Conservative or Government tax policy. We are debating the regulations before us.

Mr. Francois: Thank you, Mr. Illsley.

Several hon. Members rose—

Mr. Francois: What an embarrassment of riches. I give way to the hon. Member for Colne Valley (Kali Mountford).

Kali Mountford: If the hon. Gentleman were in office and considering the operation of tax credits, would he take into account in the uprating any targets for removing child poverty?

Mr. Francois: We are reviewing how to make the system work better. I thank the hon. Lady for artfully tempting me to pre-empt the conclusions of that review, but I hope she will forgive me if I resist that temptation.

Contents Continue
House of Commons 
home page Parliament home page House of 
Lords home page search page enquiries ordering index

©Parliamentary copyright 2006
Prepared 21 March 2006