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Baroness Byford: I shall speak to Amendment No. 187. This again is a probing amendment but I hope for clarification from the Minister. Many of those entitled to tax credits will be treading a very fine line between Micawber's two states of pecuniary bliss and misery. Recovery of overpayment of credit will be a near impossibility for many. To indulge in the cost of dislocation, the loss of earnings and the stress of a court appearance to win a point against someone who has little or nothing to offer is perhaps an unnecessary charge on the state. When do the Government expect action to be taken? Will everyone be taken to court for underpayment?
The noble Baroness, Lady Hollis, commented on the need to have some form of graduated scale for repayments—monthly, quarterly or whatever might be necessary. The Minister might like to consider that, because I am sure that none of us wishes to see unnecessary use of the public purse in pursuing someone who has very little chance of repaying, even if it is for a short period.
Lord McIntosh of Haringey: I agree with a great deal of what the noble Lord, Lord Freeman, and the noble Baroness, Lady Byford, have said about their amendments. The noble Lord, Lord Freeman, is right to say that it is in the interests of the Inland Revenue that people whose income increases during the year—and whose entitlement to tax credit consequently decreases—should notify the Revenue not just six monthly but at any time. It is in the interests of the Revenue that overpayment should not build up over the period of the year.
The original intention in having the assessment made on the whole-year basis was to save employers work. I am sure that the noble Lord, Lord Saatchi, and the noble Earl, Lord Northesk, are well aware of that point and the reasons why saving employers work means additional complication in the legislation. The noble Lord, Lord Freeman, is right to say that it is to the advantage of people receiving credit that they should not build up overpayment so that they have to make a repayment at a particular time.
The solution proposed in Amendment No. 173 is that where there is a declaration by the person after the expiry of the first six months that there will be an
overpayment, no overpayment should arise in respect of the first six months of the tax year. That is a very considerable reimbursement to the person who is receiving credit—it is a very considerable bribe. We would have to calculate very carefully how much it would cost and whether it would be just to do that.As has been discussed at earlier stages in this Committee, we have provided that the need for claimants to contact the Revenue to tell it about changes in their income should be reduced by the fact that only increases in annual income of more than £2,500 can have any effect on entitlement. That is a better way of doing it—it is failsafe, and ensures that there are fewer cases of overpayment that has to be repaid. The solution proposed in Amendment No. 173 is erratic and incalculable in its effect and I prefer the way in which we are proposing to deal with what is undoubtedly a potential problem.
Amendment No. 187 is concerned with the recovery of overpayments and the imposition of penalties. We intend to require the Revenue to offer instalment terms to all claimants who are subject to a penalty. I assure the noble Baroness, Lady Byford, that the Inland Revenue will take into account the size of the debt, the resources available to the claimant and, where appropriate, the particular circumstances of the case when deciding on the method and rate of recovery for tax credits. It is important to ensure that people do not suffer undue hardship when a recovery system is being made. We certainly do not want to follow the Australian example, which is to issue a one-off demand. The timescale for recoveries will depend on the claimant's resources and the amount of overpayment. Furthermore, clear guidelines will be issued about how far future tax credit awards can be reduced to recover overpayment. That is exactly as it is for income tax where underpayments can be dealt with by an adjustment to the coding for the next year, rather than by writing a cheque to the Inland Revenue.
I do not think the amendment would be particularly effective or fair because it is concerned with penalties. Such penalties are levied only on individuals who have been fraudulent or negligent. It would not be right to have a leniency provision such as that proposed by the noble Baroness, Lady Byford, specifically for those people who have been fraudulent or negligent. It is better to have a system of the kind in place for income tax; that is, of the kind that will be set out in regulations and guidance and which would apply to everyone.
Lord Higgins: I have listened with interest to the amendments of both my noble friends. Perhaps I may clarify one or two points in relation to the Minister's last remarks. First, is it correct to say there will be no overpayment arising if the individual's income rises by less than £2,800 during the year?
Lord McIntosh of Haringey: £2,500, yes.
Lord Higgins: I beg your pardon, £2,500. Secondly, as far as penalties are concerned and given Amendment No. 172 that we have just carried, suddenly we see introduced the concept not of award
or entitlement, but that of termination. Will penalties be imposed if termination is decreed by the Revenue in the light of Amendment No. 173? That is to say, if it turns out that the individual was not entitled to the award at all and it is terminated, is he then liable to penalties?
Lord McIntosh of Haringey: He is liable to pay back the award. I do not know whether that would be called a penalty.
Lord Higgins: Is he liable to a penalty on top of that?
Lord McIntosh of Haringey: Not unless there has been fraud or negligence.
Lord Freeman: I am grateful to the Minister for his clear exposition. He is quite right to address the amendment as tabled and not as I argued it. I accept that that is the correct way to proceed. I hope that I have made it clear to the Minister that I was not expecting an unlimited waiver of tax overpayment for the first six months. I am grateful to the Minister for his remarks, which I shall study carefully. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord McIntosh of Haringey moved Amendment No. 174:
- After Clause 28, insert the following new clause—
On Question, amendment agreed to.
Clause 29 [Incorrect statements etc.]:
The Earl of Northesk moved Amendment No. 175:
The noble Earl said: Amendments Nos. 181 and 184 are grouped with this amendment and I therefore propose also to speak to them. Our debates on the Bill have not yet focused on the issue of fraud in the way they did in another place. It may be that, as a result of the Budget having put some more flesh on the bone of the Bill, we now have rather more to get our teeth into.
Fraud is an important matter in the context of the Bill. Accordingly, part of my aim with these amendments is to provide an opportunity for a wide-ranging debate of the issue. I need not rehearse all the arguments. I suspect that the Committee, and least of all my noble friends, would not thank me for lapsing into a rambling Second Reading speech. However, a few key elements need to be aired.
All agree with the necessity of bearing down on fraud within the welfare system; that is not the point at issue. Equally, most commentators agree that the potential for fraud within the tax credit system is particularly acute. The experience from overseas, particularly in respect of the Canadian working income supplement and earned income tax credit in the USA, lends ample support to this view.
Part of the problem is that it has proved difficult to get a feel for the level of fraudulent activity present within existing tax credits. On two previous occasions in our Committee proceedings, I have referred to the Inland Revenue benchmarking study into the level of fraud in tax credit claims. I understand that the results were reported to Ministers in September of last year. Yet here we are eight months later and, so far as I am aware, not a dickie bird of the findings has found its way to Members of Parliament. I ask again whether the Minister will give us some idea of the levels of fraud that the Revenue has found in the tax credit system. Who knows, perhaps this will be third time lucky.
I emphasise that we do not wish anything to be revealed that might compromise the Revenue's on-going battle against fraud; we merely wish to know the Revenue's estimates of the scope of fraud within the existing system. We have recently learnt—and perhaps the Minister will confirm this—that in the year to March 2001, estimated figures for the amount lost to fraud in relation to income support and jobseekers' allowance have risen to £2 billion; and the estimated cost of errors by claimants and staff was about £1 billion—a total of £3 billion, representing an increase of close to 50 per cent on the previous year.
Insofar as the tax credits we are debating in the Bill are more susceptible to fraud—and, indeed, that some of the fraud cited will inevitably transfer into the tax credit system—these figures are worrying. We do not question that the Revenue is proactively involved in rooting out such criminal activity. Again, that is not the point at issue. As evidenced by the problems with the new £5 notes reported in today's media, what matters is whether the design of the system deals with the problem in the most appropriate way.
I offer a few examples. As I understand it, WFTC claimants are required to give documentary proof of their earnings whereas claimants for child tax credit and working tax credit will not have to do so. The childcare element of the working tax credit will not be paid direct to the childcare provider, a decision described as "very strange" by Rosemary Murphy, the chief executive of the National Day Nurseries Association. Perhaps it is, as it were, an unforeseen consequence of the Government's desire to integrate benefits and tax that, again as I understand it,
All of this should tell us that it is important that we send as clear a message as we can that we are not prepared to tolerate fraudsters, hence the amendments. Their purpose is, I hope, self-evident. By creating a separate offence of defrauding the tax credit system they seek to distinguish between the degree of seriousness that the law attaches to offences arising from negligence or fraud.
I should like to add a few points about their detail. In both cases, Amendments Nos. 175 and 181 seek to delete the words "fraudulently or" from Clause 29. In so doing, they limit Clause 29 to a test of negligence. As I read Clause 29, its particular target, if I can put it this way, is the claimant. Here we should be mindful that in this context take-up and fraud are almost two sides of the same coin. As the National Association of Citizens Advice Bureaux has observed:
The point is that at the take-up end of the scale complexity acts as a discouragement. It can also be said that it breeds fear, a fear which is heightened because of the attendant risk of being accused of fraud if an individual makes a mistake in framing an application. On the other hand, at the fraud end of the scale, complexity acts as an encouragement—the more complicated the system, the easier it is to exploit its flaws. In other words, it is necessary in respect of the penalties clauses to look down both ends of the telescope at once. This is the basis upon which our wish to distinguish properly between negligent and fraudulent is based.
As to Amendment No. 184, I have noted the insistence of the Financial Secretary during proceedings in another place that the new clause embodied in the amendment is unnecessary on the basis that everything it seeks to achieve is already in place in Clause 33. It may well be that the Minister will deploy a similar argument today. I do not necessarily disagree with the point. In fact, in at least one respect, I would even welcome it as a response. It would be tempting to suppose that the use of the words "fraudulently or" in Clause 29 could be something of a drafting anomaly. Clauses 33 and 34 are specifically headed "Fraud", and yet references to fraud creep into Clauses 29 to 32, headed "Penalties". I merely speculate whether it might be more convenient for all concerned that the provisions relating to fraud be consolidated in their own section. Accordingly, in the spirit of helpfulness, I invite the Minister to contemplate such a proposition between now and Report. I beg to move.
"UNDERPAYMENTS
(1) Where it has been determined in accordance with the provision made by and by virtue of sections (Decisions after final notice) to 20 that a person was entitled, or persons were jointly entitled, to a tax credit for a tax year and either—
(a) the amount of the tax credit paid to him or them for that tax year was less than the amount of the tax credit to which it was so determined that he is entitled or they are jointly entitled, or
(b) no payment of the tax credit was made to him or them for that tax year,
the amount of the difference, or of his entitlement or their joint entitlement, must be paid to him or to whichever of them is prescribed.
(2) Where the claim for the tax credit was made by one person on behalf of another, the payment is to be made to whichever of those persons is prescribed."
4.15 p.m.
Page 19, line 38, leave out "fraudulently or"
"CAB evidence is that both the benefit and tax systems are complicated and intimidating to those lacking in financial literacy skills".
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