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Baroness Hollis of Heigham: My Lords, the noble Lord, Lord Saatchi, invites us to begin our proceedings as in Grand Committee—I was going to say with a philosophical debate but, after Starred Questions today, it is probably a theological debate about the nature of tax credits and whether payable tax credits ought really to be described as benefits. I suspect that there will be no meeting of minds on this issue. We discussed the matter in Grand Committee; I followed that up with a letter to his noble friend Lord Higgins in which I explained that the accountancy devices now seem to be both nationally and internationally consistent—and there is still no meeting of minds.

The noble Lord, Lord Saatchi, made the point that a payment of money to a claimant which does not offset tax that he would otherwise have had to pay should not be called a tax credit. He prayed in aid an NVQ 2 accountancy book. His reading of that is probably the best argument I have yet heard for having an annual updating of textbooks, to the greater profitability of the authors and the greater elucidation of their readers.

The noble Lord, Lord Saatchi, wishes to preserve the divide between those who receive support from the state by way of being required to pay less into the state's coffers and those who receive a direct payment out of those coffers. He seems to think that one form of support is perhaps more respectable than the other. I do not believe that the distinction should be preserved.

The tax credits introduced by the Bill will be much more closely aligned with traditional income tax than their predecessors, in a way which will enable the tax system to recognise family circumstances and resources. The new tax credits will run in line with the tax year, ending the six-monthly stops and starts of the present system; they will be based on the gross income of claimants for a tax year instead of on a snapshot of income around the time of claim; and they will be based on a definition of income which is much closer

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to the tax definition of income, enabling people to use the information that they have for tax purposes for their tax credit claims as well.

The new generation of tax credits will be closely integrated with the rest of the tax system and therefore in respect of all these measures quite different from social security benefits. That is why, as a system, it is much more akin to and aligned with the tax system than with social security benefits.

Behind that lies a deeper reasoning. One of the aims of the tax credits introduced by the Bill is to overcome the divide that currently exists between different systems of support, not only to give greater continuity of support for children but to allow people more easily to move out of work, into work, and, if they fall back onto benefits again, none the less to have continuity of support and not have to change from one system to another.

If we were to accept the reasoning behind the amendments of the noble Lord, Lord Saatchi, it would obviate what we are trying to do—that is, to integrate the streams of support for children into a single system which you port from out of work and into work. As a result, as he will know—we discussed this at great length in Grand Committee—most families with two children on income support, for example, will gain more than 9 per week from the new child tax credit. It is a feature of the system that has been widely welcomed by the groups which campaign on child poverty issues.

We are introducing two new tax credits to replace six existing and often overlapping strands of support. This is brought out in the last of the amendments in this group which seeks to replace the word "both", referring to the two new tax credits, with the word "all".

Our structural reforms will reduce complexity and overlap. They will do away with supporting children on the test of whether their parents are in work or not; instead, it will be in terms of their income and so on. This fundamental change should be welcomed. We discussed this matter at great length in Grand Committee and I followed that up with very full letters about the accountancy arrangements. I believe that there is now no dispute that the way in which the Government account for these arrangements is consistent with ONS and OECD accountancy practices. I shall not go back over that issue again except to repeat that where tax credits are less than or equal to the tax liability of the family, this is scored as negative tax. This treatment is consistent with OECD and ONS guidance and broadly consistent with international guidance. We are transparent in our accountancy.

Behind that is the deeper reasoning that we wish to consolidate support for children in a way that encourages people into work but does not penalise them if they cannot work. We have developed a system of tax credits which aligns the support we are giving for children far more closely to the tax system than to the benefits system. For those three reasons—the transparency of our accountancy, the structural

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thinking behind trying to integrate tax credits, and our wish to go for simplicity rather than complexity and for support rather than drawing a line between those out of work and in work—I hope that the noble Lord will not pursue his amendments further.

3.45 p.m.

Lord Saatchi: My Lords, I am grateful to the noble Baroness for her reply. I am also grateful for her reconfirmation of the Government's change of heart about the accounting treatment of these tax credits. The reason the issue has arisen is because changes in accounting treatment are a moment when people who study accounts become wary and nervous. Any change of accounting treatment, whether in a good direction or a bad direction, is a source of difficulty for readers of accounts. We would like to call a spade a spade. These tax credits are not tax credits, they are benefits—90 per cent of them are anyway.

I shall not press the point but I should like to remind the Minister of three statements that were made in a recent article. First,

    "Reader understanding [of financial reports in the public sector] is sometimes felt by those who compile them to be a disadvantage".

The article goes on:

    "Such reports should . . . minimise jargon . . . have a logical structure . . . not be unduly distorted"—

and I draw your Lordships' attention to the last phrase—

    "by public relations considerations".

The importance of those comments lies in the fact that they were made by none other than the chief adviser to the Chief Secretary to the Treasury on the these matters, Professor Likierman. He also said in a report written with Vass that,

    "Those who wish to find out what is going on are faced with major hurdles".

We need a clear, complete and comprehensible set of public accounts, to which there are not too many changes and which conform with standards of accounting practice, so that people have a chance to carry out the detective work to find out what is really happening. That is a matter of common-sense. I am grateful for the Government's assurance that that is the way matters will proceed from now on. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 2 to 5 not moved.]

Lord Higgins moved Amendment No. 6:

    Page 1, line 14, leave out paragraph (c).

The noble Lord said: My Lords, the whole of this clause is effectively concerned with introducing two new tax credits—the child tax credit and the working tax credit—and with abolishing a series of other tax credits. One cannot help but feel that the speed with which tax credits are introduced and abolished is likely to cause some confusion.

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The amendment seeks clarification from the Minister of a particular point. Those in outside bodies—particularly those concerned with the disabled—may be a little confused by the fact that in subsection (1) we introduce two new tax credits which do not refer to the word "disabled", whereas in subsection (3)(c) the disabled person's tax credit is abolished. That may give the impression that a disabled person's tax credit has been abolished without anything being put in its place. As I understand it, that is not the case. However, it may be helpful to those reading these debates who have an important interest on behalf of disabled people they are seeking to help if the Minister could spell out precisely what is the position so far as concerns the disabled.

Baroness Hollis of Heigham: My Lords, I am very happy to do so. I hope that this will be regarded as helpful. Basically, we are integrating the support for disabled people moving into work into the working-tax-credit and child-tax-credit scenario, but with greater generosity for disabled people. In particular, where there are two disabled workers in a family, two disability elements will be payable and there will no longer be a lower threshold for withdrawal of tax credit from individual disabled workers. In other words, we are seeking to make a distinction not as regards whether someone is disabled but as regards whether we can give him support for his family. As a result, DPTC, as was, is being integrated into the new tax credit system but with more generous support than has previously been the case.

I do not know whether that gives the noble Lord, Lord Higgins, enough information. I am happy to enlarge on it if he should wish me to do so.

Lord Higgins: My Lords, it is helpful to have that on the record. We welcome what the Minister said. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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