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15 Mar 2007 : Column 171WH—continued

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Those problems were ably outlined by my hon. Friend the Member for North Thanet (Mr. Gale), who I believe even the Paymaster General would acknowledge to be something of an expert on the whole system.

Partly as a result of all the problems, the Treasury announced in the 2005 pre-Budget report a package of alterations to the tax credits system that is now usually referred to as the PBR package. The package comprised several elements, such as early reporting of changes in claimants’ circumstances. Chief among the proposed measures, however, was the decision radically to increase the so-called income disregard—the amount by which a family’s income can increase within a year without that family’s payments being affected—by a factor of 10. The income disregard was raised from £2,500 to £25,000, which is a very considerable increase. The measure was itself very expensive—a point touched on by my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke), who introduced some new information to the debate. When he receives his letter from the Paymaster General, perhaps he will be good enough to share it with me, because I should like to see her response to the analysis.

Last year, the Treasury attempted to argue that it could not successfully disaggregate the cost of the increase in the disregard, because that cost was too closely entwined with the other elements of the package. However, after persistent questioning, it relented and decided that it could do so. On 7 November 2006, I was told in a written answer from the Paymaster General that the cost of the tenfold increase in the disregard from the financial years 2006-07 to 2010-11 was likely to be £850 million. However, the acting chairman of HMRC, Mr. Paul Gray, had previously told the Select Committee on Public Accounts, on 23 October 2006, that the cost of the measure could be about £500 million a year—a far greater figure. Indeed, in evidence to the Treasury Committee yesterday, the Paymaster General’s officials revealed that the cost of the disregard alone could well reach £500 million per annum in subsequent years. There is considerable doubt, therefore, about whether the cost of the tenfold increase will be £850 million or whether in the event it will cost the taxpayer much more than that.

The cost is very important, because the PBR package is meant to be broadly revenue neutral over the next several years. To make the numbers balance, therefore, HMRC has taken a much tougher line on the adjudication of overpayments to make up for the increased cost of the other elements of the package. That matters to every Member of Parliament who deals with tax credits in the course of their casework, 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—in layman’s terms, the harsher HMRC will have to be to make the numbers add up.

Indeed, that process appears to have begun in earnest. A number of hon. Members touched on that. There is considerable anecdotal evidence from citizens advice bureaux and from hon. Members’ constituency
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correspondence and surgeries that in the past year the number of appeals being upheld has suddenly dropped off dramatically—and now the official figures bear that out. In 2005, in some 46 per cent. of appeals against recovery of overpayments, the overpayments were eventually written off, whereas in 2006 that figure fell to under 4 per cent.—a massive drop.

At Treasury questions on 1 March 2007, when the Paymaster General was pressed on the number of overpayments that were now being written off, she said that in the period from April 2006 to January 2007, of 303,000 disputed overpayments, 8,600 had been written off, which by my maths equates to some 2.8 per cent. In the real world, families are being squeezed to pay for the Paymaster General’s desperate attempts to put the system right.

We must also remember that HMRC acts as judge and jury in such cases—a point effectively made by the hon. Member for Leeds, East (Mr. Mudie). There is no independent appeal to a tribunal as there is for Department for Work and Pensions cases. In the vast majority of instances, HMRC itself rules on whether it was right or not and, not surprisingly, it tends to rule that it was correct.

Tellingly, one of the Paymaster General’s officials admitted yesterday that claimants often have trouble understanding their tax credit awards. How can claimants be accused of having failed to notice that they were being overpaid when HMRC admits that many claimants do not understand what they are receiving in the first place? If people genuinely have difficulty working that out, how can they reasonably be expected to calculate whether they have had too much or too little? That is an absolute weakness in the very complicated system that the Chancellor of the Exchequer has devised.

The Treasury must be taking a harsher attitude towards overpayments. If we look at table B16 of the pre-Budget report 2006, which is headed “Total managed expenditure 2005-06 to 2007-08”, under the line item for tax credits we see that the outturn figure for 2005-06 was £15.4 billion, the estimated outturn for 2006-07 was £16 billion and the projection for 2007-08 was £15.8 billion—in other words, a decline of £200 million from 2006-07 to 2007-08.

My hon. Friend the Member for South-West Hertfordshire mentioned that we recently debated a statutory instrument to uprate tax credits for the new financial year—the draft Tax Credits Up-rating Regulations 2007. In respect of those regulations, the total cost of the uprating, as given to the Committee and, if I remember correctly, contained in the explanatory notes, was £990 million—a fraction short of £1 billion. In simple terms, the actual cost of the outgoing payments to claimants next year will go up by the best part of £1 billion, yet the total cost of the system, according to the PBR, will fall by £200 million. On top of that, we have to add the increased cost of the income disregard.

It seems to me that the only way in which the Treasury can attempt to make everything balance out is to take a much harsher view on the judgment of appeals against the recovery of overpayments. The fact that we have gone from almost one in two appeals in which the money is waived to fewer than one in
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20 bears that out. Ordinary families are paying for the Treasury’s and HMRC’s mistake.

The scale of overpayments has become a source of irritation to many Labour Members of Parliament as well. When I debated the regulations on the uprating of tax credits on 8 March, the hon. Member for North Durham (Mr. Jones) pressed the Paymaster General on the issue. He said:

During the Treasury Committee hearing yesterday afternoon, which I also attended as a member of the audience, the hon. Member for Newcastle upon Tyne, Central (Jim Cousins) stated directly to the Paymaster General:

Moreover, the method of adjudicating overpayments has now led to complaints even from Labour Members, just under 100 of whom have signed early-day motion 545 entitled “The Recoverability of Overpaid Tax Credits”. Indeed, the hon. Member for Leeds, East has put his name to that motion. It calls for reform of the way in which the pursuit of overpayments is administered in practice, so even among the Paymaster General’s own ranks, there is a growing chorus of complaint about how the tax credits system works in practice. It is not only Conservative and Liberal Democrat MPs who are complaining about that; large numbers of Labour Back Benchers are doing so as well. As Labour’s poll rating drops and, understandably, its MPs become even more sensitive to constituency complaints, the volume of complaint from the Labour Benches against the tax credits system has increased accordingly.

A former Home Secretary, the right hon. Member for Sheffield, Brightside (Mr. Blunkett), as reported in The Guardian on 12 October 2006, made this note in his diary:

Mr. Todd: He put it in his diary?

Mr. Francois: Yes, it was on pain of death that it should not be mentioned, but the right hon. Gentleman gave that quote to The Guardian. I am not
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responsible for that. Nevertheless, it is a pretty powerful quote from a former senior member of a Labour Cabinet.

Even the former Minister for Welfare Reform, the right hon. Member for Birkenhead (Mr. Field), said on his own website that trying to alleviate poverty with the current tax credits system was like

He went further in The Spectator on 24 February, when he said:

He then added for good measure,

He might be right about that.

In summary, the tax credit system is over-complicated and in a mess. Almost half the payments in the system turn out to be wrong, and overpayments are running at 2 million a year. Even the Chief Secretary to the Treasury admitted, in a written ministerial statement of 5 June 2006, that the new package of measures, including the tenfold increase in the disregard, would reduce the likely number of overpayments by only a third. So even with all that extra taxpayers’ money, the Government estimate that they will reduce the 2 million overpayments by only one third. They have chucked even more taxpayers’ money at the problem, but they still cannot make the system work properly. As a result, more than a third of a million people a year appeal against attempts to recover overpayments.

Even Labour MPs who supported the Chancellor’s highly complicated system are losing faith in it and putting the Paymaster General under increasing pressure. I have some sympathy for the right hon. Lady, however, because she continues to have to front for the system to the House. Each month, there is almost inevitably a question about tax credits in Treasury questions, and it is noticeable that the Paymaster General rises to answer while the Chancellor sits silently. As one of my colleagues once pointed out, he might be a right hon. Gentleman, but he is hardly right hon. and gallant when it comes to tax credits.

There are two possibilities. Either the Paymaster General is in denial about the problems with the system and continues to insist that all is well as the water rises around her, or she is now in what has been called the ministerial cocoon. Is it that she is surrounded by senior civil servants who tell her repeatedly that the problems are minor and that all is well, despite the fact that a third of a million people appeal against the system every year? I shall leave it to her to judge which of those is true. Either way, the system is absolutely crying out for simplification and reform. That is why the Conservatives have launched a reform of the tax credits system as part of our wider policy review. We want to create a simpler, more efficient system that helps those who need it, without driving them to distraction. That work is ongoing, and I look forward to debating it with the Paymaster General.

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4.52 pm

The Paymaster General (Dawn Primarolo): This all feels a little like groundhog day, as I have covered with the Treasury Select Committee many of the subjects that have come up this afternoon.

I start by paying tribute to the valuable work of the Select Committee and its Sub-Committee, under the chairmanship of the hon. Member for Sevenoaks (Mr. Fallon), in examining the administration of the tax credit system. The Committee has shown a continuing interest in the effective implementation of tax credits. Its June 2006 report, which contains some 52 recommendations, was well received on both sides of the House and was the focus of an Opposition day debate in the same month. The report also informed the debate that followed an oral statement that I made in the House in July 2006.

Today, some hon. Members have swung from saying that they do not have enough information to then quoting all the information that they have. There is an extensive amount of information on the tax credit system available. I shall address the points that hon. Members have made today, as well as the Committee’s 52 recommendations and the ombudsman’s recommendations. The purpose of Committees making recommendations and the Government responding to them is to take matters forward.

Although I knew it to be the case, I am grateful to the hon. Member for Sevenoaks for reminding hon. Members that the principle of tax credits is not in question. Neither are their flexibility, responsiveness or ability to support people on the lowest incomes, who are given the highest payments. They support child care, and both support and encourage people in returning to work. All the statistics bear those facts out. Some hon. Members, particularly the Liberal Democrat spokesman, said that they support the system but want to destroy it and put something else in its place. I look forward to engaging with the hon. Member for Rayleigh (Mr. Francois) on the Conservative party’s thoughts, values, propositions—I do not know what they will be—perhaps even policies, on how to deal with tax credits.

The tax credit system is huge and deals with about 20 million people throughout the UK, including 6 million families and 10 million children. Take-up of that benefit is substantially higher, not a little bit higher, than that of any previous income-related financial support for families in work. Low-income families are the most likely to take up their entitlement. The Department’s figures, which were published on 1 March, show that take-up among people with incomes of less than £10,000 is up from 93 per cent. to 97 per cent. and rising. Information from the Organisation for Economic Co-operation and Development and from other sources, not just the Department, show that tax credits have been central to reducing the tax burden on low to middle-income families, and have ensured that 3 million families with children pay no net tax.

Mr. Francois: I am grateful to the Minister for giving way; I am not trying to spoil her flow. She has used the 97 per cent. take-up figure several times. Does that include child tax credit and working tax credit or just one of them? If the latter, which?

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Dawn Primarolo: I take it that the hon. Gentleman read yesterday’s transcript. Perhaps he simply read it selectively. That same question was asked of me then and I made it clear to the Committee that I was talking about the child tax credit. I also said that I would send to the Committee the full breakdown, which does exist, of tax credits, including for child care tax credit and working tax credit. A comparison of the take-up of child tax credit with that of income support or family credit, which, even at its height, reached only just over 50 per cent. of those who needed it most, shows that there has been substantial progress.

Performance within the tax credit system has improved. As the Department has taken recommendations on board and changed the system, administrative error has declined substantially. Published figures, which the hon. Member for Rayleigh can look at, demonstrate that improvements in accuracy in calculating and processing awards rose from 78 per cent. in 2003-04 to 97.7 per cent. in 2005-06.

Many of the measures in the 2005 pre-Budget report will ensure further improvements. Many improvements are mentioned in the 52 recommendations of the Committee. Reference has been made to the disregard, but there was also a successful shortening of the renewal period to five months. It will be shortened again to four months this year. That is important in the context of overpayments, because it means that there is a continual shortening in respect of potentially out-of-date information on which the awards are delivered.

Changes are being made on the reporting of circumstances. I want to pick up some of the points that have been made. We are trying, in particular, to ensure a reduction in the areas where there may be a risk. I should refer to the question of relationship break-up, because it has been mentioned. There have also been changes in award notices, in the information delivered routinely to claimants and in the tax credit office, which deals with disputes over claims within a specific period.

Let us consider contact centres, which are the claimants’ preferred method of contacting the Department. Some 98 per cent. of calls are dealt with in the day of the call, and the performance level of the contact centres is high. Last year, we increased the capacity by 1,300 to ensure that the Department was responding specifically to the points that hon. Members have made.

I shall address some of the points that have been made, starting with the point about fluctuating incomes made by the hon. Member for Sevenoaks. He is right that there are two issues concerning how fluctuating incomes can affect the tax credits system. When the system was designed there was incredibly limited information on how family incomes changed within a tax year, given the elapsing of time and the changes in the labour market. The subsequent research by John Hills which was published in March 2006 confirmed for the first time—it also made the information available for the first time on a systematic basis—that a significant number of families had unstable incomes from week to week, or even from month to month, as my hon. Friend the Member for Leeds, East (Mr. Mudie) said.

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