Tax Credits (Claims and Notifications) (Amendment) Regulations 2006
Mr. Timms: I do not have that figure, but the change to which the hon. Gentleman is referring has always had to be notified under the existing arrangements. That is not a new requirement and I am not aware of special difficulties arising from it.
Mr. Francois: I am not trying to delay the Chief Secretary. If he does not have the figure at his fingertips, will he undertake to write to me with it before the House rises for Christmas?
Mr. Timms: I am certainly happy to see what information is available on that subject and to let the hon. Gentleman have it as soon as I can.
There is no doubt that the system has improved over the past year or so thanks in no small part to representations from the ombudsman, Citizens Advice, the Child Poverty Action Group, the National Council for One Parent Families, the Low Incomes Tax Reform Group, and Members of the House. However, we must do more.
National statistics show that end-of-year adjustments leading to an overpayment have fallen by one fifth. Fewer overpayments are now caused by IT or administrative error, and accuracy in processing and calculating awards rose from 78 per cent. in 2003-04 to almost 98 per cent. last year.
Hon. Members will be aware of a packet of changes that were announced in the pre-Budget report last year, one of which is to the rules on reporting change of circumstances, which is the subject of the regulations before the Committee today. The regulations do two things. First, as the hon. Member for Inverness, Nairn, Badenoch and Strathspey rightly said, they reduce the time allowed to report changes that reduce entitlement from three months to one month from April next year. That will shorten the period in which people may be paid too much and so reduce the risk of overpayment. Secondly, they make it obligatory to report that a person is no longer working 16 or 30 hours, or that they are no longer responsible for a child or young person, or that a child or young person ceases to qualify for support.
The background is that an important reason for overpayments is that people do not keep HMRC up to date with changes that affect their awards. If they do not tell HMRC, for example, that they are no longer responsible for a child, it can mean they are being overpaid £150 for each month of delay. It is important from every point of view to tell HMRC quickly about such changes.
Danny Alexander: One of the things that many of our constituents feel frustrated aboutI have many such cases in my constituencyoccurs when they repeatedly tell HMRC something, but the information is not logged into the system or taken into account.If someone gives information to HMRC on the telephone, but the information is not logged into the system properly and they receive a letter back telling them that their circumstances are as before, how would the one-month rule apply? That is frustrating at the moment, and could be even more frustrating if fines are attached and the problem has been the Revenues fault.
Mr. Timms: First, let me say that there is no excuse for the sort of experience that the hon. Gentleman describes. There have certainly been too many such incidents, but progressively those problems are being put right. However, in terms of a fine, Revenue and Customs will be flexible. The aim of the change is not to collect more fines; it is to encourage people to give information faster. In that way, we are tackling the root cause of overpayments: that information is not handed over quickly enough.
The hon. Gentleman may take some encouragement from the fact that there are fines in the system at the moment that apply in respect of three months rather than one. It appears as if fewer than 100 such fines have been issued since the introduction of tax credits. I can reassure him that only as a last resort will HMRC impose a fine. If there is a suggestion that the person gave the information in good time but that something went wrong in the system, there would be no question of a fine.
Danny Alexander: I am grateful for that reassurance. The Chief Secretary has given a figure of how many fines have been levied under the current system. What forecast has he made of the number of fines that he would expect to be levied should the regulations come into force?
Mr. Timms: I have not made a forecast of that. I would anticipate it to be likely that more people could be liable to a fine, but fines will be applied only in the last resort and when there are particular difficulties. I do not anticipate a large number of fines, because this is all about making it clear to people what is required of them, to encourage them to provide the information more quickly and so avoid overpayments.
The hon. Gentleman asked fairly and properlywhat would be done to notify people of the new requirements. Revenue and Customs has written to all claimants to inform them of what they need to report under the new rules. He might have noticed the advertising campaign When life changes, which reinforces the message to report changes. A lot of effort is going into ensuring that people know the position.
The hon. Gentleman might be interested to hear the preliminary feedback from qualitative research recently carried out by HMRC. It was not carried out among a large number of people, but their attitudes are illuminating. It stated:
Across the board, participants appeared to be aware oftheir obligation to contact HMRC instantly should their circumstances changethe message was so clearly and repeatedly stated in all correspondence and advertising that participants said they could not forget it. Participants also
The research goes on to give a couple of quotes from individuals. The message is getting across, but the hon. Gentleman is right to draw attention to the importance of this matter. It will be vital that our efforts continue.
Danny Alexander: That is a fascinating quotation from research. I trust that having referred to the document in a parliamentary Committee, the Chief Secretary will deposit it in the Library so that Members of all parties can study the results of the research in detail. It sounds as if it will be very informative for all of us who are interested in matters relating to tax credits.
Mr. Timms: It certainly will be made available in due course. I said that I was quoting from a preliminary finding, and the results will be made available.
Just as Revenue and Customs has responsibilities, so do claimants. Like all good social policy solutions, this is a balance between exercising rights and discharging responsibilities. When people know that their circumstances have changed, they need to inform HMRC, and from next April, they will have a month in which to do so.
HMRC consulted the representative bodies in detail on how the new policy on reporting the changes will be put into practice. I believe that a meeting is taking place at this very moment with the lobby groups that have been active on this and have played an important part. The representative bodies were understandably concerned about what happens when there is uncertainty at the time when the change took placethe kind of example that the hon. Gentleman gave. For example, when an individuals hours vary considerably, it might not be easy to tell when they have dropped below 30 hours a week until some time later.
So, regulation 5 sets the reporting requirement from when the person knew about the change, if that is later than when the change took place. That is a helpful change; it is certainly in response to what the lobby groups told us. I do not agree with the hon. Gentlemans comment that it makes things harder. The system will not assume that people knew things if in fact they did not, and that is an important safeguard. That means that Revenue and Customs will not penalise people whose circumstances change without their registering that change.
Mr. Francois: This is important. Let us take the case of a part-time worker whose hours vary quite a bit over the tax year. If we read the regulation literally, it appears that that person will need to contact the tax credits officer every time their hours vary above or below 30 hours a week or, in some cases, 16 hours a week, which could mean multiple, if not many, reportings in the course of a year. Is that not correct?
Mr. Timms: Revenue and Customs will be pragmatic about this. It is possible, although not very likely, that peoples hours will vary a lot around the figure 16 or the figure 30. However, I do not think that that will be common, and, in the end, it is the value over a period that is important. What is key, however, is that Revenue and Customs will be pragmatic, sensible and proportionate.
I am glad that hon. Members have had an opportunity to raise their concerns, which are very fair, and it is right that they should be raised in the House. The regulations improve the administration of the system and help to strike the right balance between certainty and flexibility, rights and responsibilities. As a result, tax credits will do more to improve work incentives and reduce both the tax burden on families and child poverty. I commend the regulations to the Committee.
Mr. Francois: It is a pleasure to serve under your chairmanship, Mrs. Dean, and I am sure that you will keep us in good order as we debate these important regulations. It is also a pleasure to see the Chief Secretary. At one stage, we were apparently to be treated to an appearance by the Economic Secretary instead, but according to Gallery News, he isliterallyplaying Santa Claus at the Westminster kids club Christmas party, so is unable to be with us. We wish him well with that.
The hon. Member for Inverness, Nairn, Badenoch and Strathspey (Danny Alexander) has already dealt with the issue before us in some detail. I say this with no disrespect to him, but I had expected to be dealing with the hon. Member for Yeovil, having had a conversation with him about this issue earlier in the week. Clearly, however, events have overtaken us, and the hon. Member for Inverness, Nairn, Badenoch and Strathspey has deputised well for his colleague.
I do not propose to go over every issue that the Liberal Democrat spokesman raised, but I shall press the Minister on a few points while we have him here. They relate to the overall pre-Budget report package and to the way in which the changes in the regulations will impact on it. The power to make the present changes is contained in the Tax Credits Act 2002, but as the policy background section of the explanatory memorandum notes, the changes form part of a package of measures that were announced alongside the 2005 pre-Budget report, and which are collectively known as the PBR package for shortthat tends to be the description that is used in the tax credits community.
There are two key elements in the overall package that we are debating. First, from 1 November 2006, they impose a requirement to notify additional changes in certain circumstances, such as changes to working hours. Secondly, from the beginning of the new tax year in April 2007, they will reduce from three months to only one month the time in which claimants can notify required changes of certain circumstances, such as changes in the composition of a household claiming tax credits. A number of important points flow from those changes, and I should like to put them to the Chief Secretary.
First, I should like him to answer the central chargeif I may say so, I do not think that he really hasthat the regulations will make it particularly difficult for agency and shift workers to comply, because their numbers of hours worked and associated income often vary quite legitimately from week to week, depending on the demands of their employer or the client company that their employers, such as the
Broadly, following PBR 2005, it is now obligatory for a tax credit claimant to report to HMRC any changes in their normal working hours which causes them to fall below the 16-30 hours a week, or the 30+ hours a week, bands.
We worry that this will adversely affect large groups of low-income workersspecifically agency workers and certain shift workerswho have no normal working hours as such, they simply work the hours they are given from week to week. Therefore it is practically impossible for them to tell when their normal working hours fall below 30, or 16, a week, because they have no normal working hours. We have seen cases of compliance officers being quite unreasonable in their approach to such workers and their inability to give a precise estimate of their normal working hours. It is unfair to impose a penalty on claimants for failure to comply with an obligation which is itself uncertain.
I apologise for the length of that quotation, Mrs. Dean, but it summarises the problem neatly. The situation that it describes is clearly at variance with the Chief Secretarys description of HMRC as reasonable. Many of the people who have been in dispute with it over its attempts to recover overpayments would have a number of words to describe the way in which they have been treated but, from what I have seen in my postbag, reasonable would not be the first to spring to mind. How will the regulations be interpreted in the cases of people who, through no fault of their own and even if they try to do everything right, will have trouble in keeping on the right side of the law because of the nature of their employment?
Secondly, I would like to press the Minister on the likely consequences of the changes for the tax credits appeal system. As he knows, the PBR package of changes, of which the regulations are an integral part, was supposed to be broadly revenue-neutral over the next several years. We suspect that elements adding significantly to the cost of the package, such as the tenfold increase in the income disregardof which more laterhave been compensated for by HMRC through a tightening up on tax credits appeals. That is important.
Will the Minister confirm that since the first elements of the PBR package started to come into effect at the beginning of the 2006-07 tax year, the number of successful appeals against the recovery of overpayments has suddenly fallen off dramatically? In fact, according to a written answer from the Paymaster General, dated 18 July 2006, the number of overpayments that were successfully disputed was around 2,000 in February and around 1,500 in March, but fell to as few as 100 in April. That compares with around 26,000 disputed overpayments that were protested to the tax credit office in April. Even though they are not all the same cases, that means that, as a rough ratio, less than 0.5 per cent. of appeals against recovery of overpayments were successfully disputed and judged in favour of the claimant. It appears that, since the new package came in, HMRC is suddenly saying no in a vast number of appeal cases. Will the Minister confirm that?
Danny Alexander: The hon. Gentleman is makingan important and fundamental point. I am the vice-chairman of the all-party group on citizens advice, and Citizens Advice has reported that its experience is along exactly the lines that he describesthe gateway for appeals has suddenly got a lot tighter in the past few months. I hope that he will press the Minister on the concern, which I share, that the regulations might be yet another small-print excuse for HMRC to turn down appeals that most of us would regard as reasonable.
Mr. Francois: I thank the hon. Gentleman for that contribution, which clearly followed my point. There is considerable anecdotal evidence from citizens advice bureaux and in Members constituency correspondence and surgeries that in the past few months the number of appeals being upheld has suddenly dropped off dramatically. The most up-to-date figures that we have are the ones for April that I have quoted. The regulations seem a perfect opportunity to hold the Government to account and ask where the trend is going. The system overpays nearly 2 million families a year, who have suddenly found that their appeals are being turned down in massive numbers.
We must remember that HMRC acts as judge and jury in such cases. There is no independent appeal, as there is for Department for Work and Pensions cases. In the vast majority of cases, HMRC itself rules on whether it is right or not and, not surprisingly, it tends to rule that it is correct. Perhaps the Minister can give us this afternoon the latest figures for those claims. I am sure that the entire Committee would be grateful.
Thirdly, how confident are Ministers that HMRCs IT system will be able to cope with these additional changes? That is a live issueif people will pardon the punbecause one of the two criteria for appealing successfully against the recovery of an overpayment is that HMRC admits that it has made a mistake. Unfortunately, such is the complexity of the system devised by the Chancellor of the Exchequer, combined with the historical unreliability of the associated computer system, that mistakes in the tax credit system are legion. That is partly why HMRC sacked its previous IT contractor, EDS, and brought in another company to try to salvage the whole complicated process.
Independent commentators have made a big issue of the IT problems. Robert Chote and Mike Brewer of the Institute for Fiscal Studies pointed out in a newspaper article about computer problems in the system, which will affect these regulations:
A combination of IT problems, an overly complicated design and the inability of many families to provide information to the Revenue as quickly and accurately as expected has meant around £2bn a year has been handed out in overpayments. Not all these overpayments were mistakes. But they lead, at best, to inconvenience and at worst to anxiety and real hardship. Some recipients have had no idea when they were being deliberately overpaid. Often cash-strapped households, they simply spent the money they had been givenand then became distressed when they were required to pay it back.
Some of the changes proposed today, such as where hours worked may vary considerably from week to week, which we have discussed, are quite complicated, so given the very poor record of the IT system to datewhich was admitted to by the Government in a
Fourthly, I would like to press the Minister on the likely financial consequences for the taxpayer of the PBR package as it incorporates the changes proposed today. The explanatory memorandum to the regulations is vague on the costs associated with the changes. Under heading 8, Impact, it states:
The impact on the public sector is included in the estimate of the yield of the tax credits package, published in Table 1.2 of the Pre Budget Report 2005.
However, that table does not break down the costs of the individual elements of the package, as Ministers were arguing, at least at the time of the 2005 pre-Budget report, that those individual elements were difficult to calculate.
In fairness, since then Ministers have come upwith at least general estimates for the cost of some elements of the package. For instance, I was told in a recent written answer from the Paymaster General on7 November that the cost of the tenfold increase in the disregard to 2010-11 was likely to be £850 million combined over the period. Can the Minister tell the Committee what costs or, indeed, savings are estimated to come from implementing the elements of the package that we are debating? If, as I suspect, they will ultimately be revenue positiveHMRC will be clawing back moneycan the Minister tell us by how much the Government expect them to be revenue positive?
Similarly, can the Minister tell us the true cost of the accompanying tenfold increase in the disregard, which is an integral part of the same package? I ask that because the Treasurys estimate of £850 million to 2010-11 covers only the money that HMRC estimated that it would successfully reclaim, not the total liability or entitlement. The Chief Secretary to the Treasury knows exactly what I am talking about. What is the cost of the tenfold increase in the disregard if measured by total entitlement?
The acting chairman of HMRC, Paul Gray, told the Select Committee on Public Accounts on 23 October in his evidence that the cost of the measure could be around £500 million a yearor in other words, more than £2 billion over the period 2010-11, as opposed to the £850 million that I was quoted in a recent parliamentary answer. That matters to every member of the Committee who deals with tax credits in the course of their case work, because the higher the cost of the tenfold increase in the disregard, the tighter HMRC will have to rule on appeal against recovery of overpayments, as the whole package is meant to be broadly revenue neutralso in laymans terms, the harsher HMRC will have to be to make the numbers add up. We need to know what the total cost of the disregard is out to 2010-11, as measured by entitlement. The Chief Secretary well understands the issue, so perhaps he could give us that answer this afternoon.
Unfortunately, the changes that the Government propose will do little to alleviate the sense of crisis that now pervades the tax credit system. The Chief Secretary tried to give the impression that everything was now running smoothly, but in 2004-05, which is the
The changes that the Government are trying to introduce today will unfortunately do comparatively little to change that, because of the immensely complicated nature of the system in the first place. Even the Chief Secretary himself admitted in a written ministerial statement on 5 June 2006 that the new package of measures, including the tenfold increase in the disregard and todays changes, would reduce the likely number of overpayments by only a third. So, for all that additional taxpayers money and effort, the Government will be able to cut the 2 million overpayments a year by only a third. They have chucked even more taxpayers money at the problem and they still cannot make it work.
That is why the Conservative party has launched a reform of the tax credit system, as part of our wider policy review. We want to create a simpler, more efficient system that still provides help to those people who need, yet without driving them to distraction in the process. That work is ongoing and we hope to have more to say about it in due course.
To summarise, I should like the Chief Secretaryto answer the following questions directly to the Committee. What is his answer to the central charge that the change will adversely affect shift workers and agency workers? What are the likely implications of the changes for the appeal system? Has the number of successful appeals dropped since the beginning of the 2006-07 financial year, when the package kicked in? How confident is the Minister that HMRCs IT system is up to the task, given the myriad problems that have been created in the past? What are the costs of the changes and what is the associated cost of the tenfold increase in the income disregard, as calculated on the entitlement method? Finally, why on earth did the Chancellor come up with such a complicated system in the first place?
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