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
tended to have a good knowledge of the main changes
in circumstances to report: changes in working hours or income, the
birth of new children and changes in the family
structure. 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.
2.56
pm
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
agency that employs them, seek to serve. Mr. Robin
Williamson, the technical director of the Low Incomes Tax Reform Group
summarised the situation quite well in an e-mail that I have:
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
written statement only last weekhow confident isthe
Minister that the changes can be brought in successfully and on time
without further technological problems in what is clearly a very shaky
system
already? 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
latest year for which we have fully audited figures
from HMRC, of the slightly more than 6 million families in the UK who
were claiming tax credits, almost 2 million were overpaid and more than
900,000 were underpaid. In other words, almost half the payments in the
entire system were wrong.
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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