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Lord Freeman: I wish to speak to Amendment No. 54 in the anticipation that it will not take out of sequence the thoughts in the Minister's mind.

Perhaps I may follow on directly from my noble friend Lord Higgins who essentially has dealt with the point. Amendment No. 54 rests on the principle that income for tax credits should be calculated in the same way as income for revenue purposes, or, perhaps more accurately, the other way round. Again this is an example of moving responsibility for administration, assessment and payment from the organs of social security to the Inland Revenue.

I have one specific concern on subsection (8) in Clause 7. It is drafted in too broad a fashion. My amendment would ensure that the regulations, when issued and passed, would be based on Inland Revenue rules. I shall give noble Lords one practical example of subsection (8)(a); that is to say, making sure that the assessment for the purposes of income tax—income which he does not in fact have—could relate to benefits in kind.

The principle behind the amendment is to ensure that we do not allow the regulations to be drafted too generally. I would welcome the comments of the Minister on this. It may be that in subsequent parts of the Bill there is delineation and therefore I might be prepared to accept that argument. However, this clause looks too broad and we ought to ensure that Inland Revenue rules are used to calculate the basis for payment of tax credit in the same way as income.

6.45 p.m.

Baroness Hollis of Heigham: I am grateful to those noble Lords who have spoken to the amendment. Let me start with Amendment No. 158, moved by the noble Earl, Lord Russell. I understand the thrust of his argument. At the moment it is the case, as he stated, that under the current WFTC and DPTC schemes, student support in the form of loans and grants is taken into account as income with limited disregard for the cost of books, equipment and travel, on the basis that primarily the education system, not the social security system, helps students. The noble Earl, Lord Russell, refrained from going down that path, and I believe that I should do likewise.

The consultation paper issued on tax credits last summer invited views on whether to continue this approach. We have considered the issue and taken account of the views of colleagues at the Department for Education and Skills. As a result of part of a wider alignment of tax credits with the income tax system, we have decided that, in principle, student support such as loans, grants paid to meet the cost of tuition fees and income-related bursaries should be disregarded from income for new tax credits. This was set out in the Explanatory Memorandum accompanying the draft regulations on income which we published recently.

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The draft regulations will be amended to reflect this decision, which I am sure will be greatly welcomed by the noble Earl.

I should also highlight the fact that student nurses will in principle be able to claim the child tax credit. The Inland Revenue will be in touch with the Department of Health shortly to determine the extent to which bursaries received by student nurses should be taken into account as income for new tax credits. This will also apply to other students in similar situations; namely, those who are in work but with children. Having the disregard of student support in secondary rather than primary legislation will give the Inland Revenue flexibility to respond quickly to any changes in student support. Given that explanation, I hope that the noble Lord will not feel it necessary to press his amendment.

Perhaps I may return to Amendment No. 52. I am grateful to the noble Lord, Lord Higgins, for explaining his purpose here. Basically, in all such Bills, one needs what we call Humpty Dumpty clauses: when income should be deemed to be capital, capital deemed to be income, or income that should be treated as not being income when under other circumstances it may be. We have made it clear that the definition of income will be based broadly on annual income, taking into account income tax and therefore including earnings from employment or self-employment, certain social security benefits and pensions, and any other income from savings, property, trusts and overseas sources.

If accepted, the amendment would do much to weaken the Inland Revenue's paths not only to find income in connection with claims to tax credits, but to counter potential attempts by some claimants to manipulate that definition to their advantage. Perhaps I may develop that point. Sub-paragraph (a) is an anti-avoidance provision, which also appears in the rules for WFTC and DPTC—in fact I remember us debating those—and before that it was also in the rules for family credit and disability working allowance, as introduced by the previous Conservative government. Sub-paragraph (a) provides for the regulations defining income to identify when a claimant may be deemed to have income which at first sight he or she may not possess—those Humpty Dumpty clauses. They come into play if the Inland Revenue finds that a claimant has deliberately deprived himself or herself of income in order to claim or increase their entitlement to an award, for example, by transferring an interest-bearing savings account to a child or to someone outside their household when the claimant is still treated as receiving that income. There are equivalent provisions for tax to prevent people diverting their income through trusts or settlement to someone who pays income tax at a lower rate.

Alternatively, if a claimant fails to apply for income to which he or she is entitled, then apart from certain exceptions, he or she is treated as having received that income from the date on which he or she could have obtained it.

Sub-paragraph (b) serves a different purpose. As under the current rules, it will allow the regulations defining income to accept certain types of income,

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either in whole or in part, when assessing awards of tax credit. This is subject to continuing discussion with the interested parties, following publication of the draft regulations. However, in order to align the definition of income for tax credits as closely as possible with the tax system, we propose, for example, to provide that claimants in receipt of some tax exempt social security benefits, such as war widows' pensions or most payments of income support, will not have to report such income on their claim forms. Similarly, as the government announced at the time of the Pre-Budget Report last November, we shall disregard child maintenance payments in the hands of recipients, as we currently do in WFTC to help single parents going back into work. To avoid cutting across our efforts to encourage savings on pension credit by those on lower incomes, the draft regulations provide that income from special tax-free savings vehicles such as ISAs need not be mentioned in tax credit claims. That was of interest in previous debates.

I hope the Committee will agree that I have sought to clarify the purpose of the powers in subsection (8) and that they are certainly not unprecedented. They have a track history going back to family credit. I hope that as a result noble Lords will agree to withdraw the amendment.

I am grateful to the noble Lord, Lord Freeman, for his explanation of his Amendment No. 54. I entirely agree with the emphasis he placed on the need to align the definition of "income" for new tax credits as closely as possible with the income tax rules and to counter the possibility that a small minority of claimants may try to manipulate their income in order to claim or increase their entitlement to tax credits. However, the amendment is unnecessary. As the noble Lord is aware, the Government are bringing forward a technical amendment that will clarify the scope of the Inland Revenue's powers to define income for new tax credits.

In addition, the draft regulations that we published last week for consultation and to inform our debate contained detailed provisions to address the noble Lord's concerns. The Explanatory Notes pick up cases about how capital is treated, including companies' stock dividend and the like. It may be that rather than take up the Committee's time, it would make sense if I write to the noble Lord, but he will find that information there.

Amendment No. 53 is a technical amendment designed to clarify the scope of the Inland Revenue's power to define income for new tax credits by way of regulations. I have probably covered that already, but to make sure I am moving Amendments Nos. 49, 50 and 53, which I hope noble Lords will feel able to accept.

Earl Russell: I am delighted by what the Minister had to say about student loans and I thank her very warmly indeed. I will not be moving Amendment No. 158 in its place in the Marshalled List or bringing it forward on Report. Perhaps I might say a brief word about Amendment No. 54.

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The noble Lord, Lord Freeman, has heard the Minister, as it were, impale me on the lance of Humpty Dumpty earlier this afternoon, in the case of people on a life support machine. Humpty Dumpty has his uses. They are usually beneficent, but the noble Lord, Lord Freeman, asked whether the vires could be drafted in a slightly tighter manner. That is a very moderate request and one to which I hope the Minister in future may pay attention. It would narrow the gap between us on this subject considerably, but the overwhelming note on which I end my remarks is that of facts.

Lord Northbrook: I am not sure if this is the time to raise the matter, but is the definition of "income" clearly enough defined for any self-employed person who is claiming the benefit?

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