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Baroness Hollis of Heigham: My Lords, it will not surprise the noble Lord, Lord Higgins, to hear that I agree with every word spoken by the noble Lord, Lord Newby. There is an opportunity off the Floor of the House to deal with technical Bills which are elaborate in terms of their inter-connections and to be able to press in a more informal way without the Chamber being taken over by the "anorak nerds" who follow social security matters.
I turn to the substance of the comments made by the noble Lord, Lord Higgins. I am in some difficulty and ask for the noble Lord's help. I had assumed that by seeking to reverse each of these technical amendments, the noble Lord wanted me to explain what they do. I am happy to do that at considerable length. Instead, the noble Lord raised general points about responsiveness and income test, which are more suitable to a clause stand part debate or an amendment to that effect. Indeed, subsequent amendments have been tabled on what counts as relevant income to which his points might have been more properly addressed. I am in somewhat of a dilemma. I am happy to seek to explain what each of the government amendments doesand, therefore, what the original government amendments, which are now part of the Bill, didand what would be the effect on the Bill if the House were to support any of the amendments in the group proposed by the noble Lord. I am not sure that that is what the noble Lord wants.
I am happy to confirm that the amendments deal with the interaction between awards and entitlement, as the noble Lord said, and include some technical changes to the provisions about recovering overpayments and paying out underpayments when entitlement turns out to be different from the amount paid under an award during the year.
I am happy to repeat the need for this cluster of technical amendments. The new tax credits introduced by the Bill are designed to target support according to the current circumstances of claimants within the context of a system that bases entitlement to tax credits on annual income but allows for adjustment if claimants experience a change in their level of income.
Therefore, we need to make the distinction between an award, which is what one receives as one goes along, and the entitlement, which is the end-of-year reconciliation. As I believe the noble Lord understood following our discussions in Committee and the follow-up papers, there were some technical problems with the relevant provisions in the Bill as it originally stood. Most obviously, there was a contradiction between Clause 5 and some later provisions of the Bill. While Clause 5 was based on the assumption that awards would or would not end in particular circumstances, Clauses 14 to 16 made clear that the
In addition, the Bill was unclear about the effect of income on awards and entitlement. Because the new tax credits will respond to changes in income, entitlement cannot finally be determined until after the end of the year when current year income is known. However, as the Bill stood before Committee, the lack of such a clear distinction meant that claimants might face having their entitlement curtailed because of decisions taken by the board during the year based on expectation about income. In particular, if the board decided not to make an award in the expectation that a claimant's income would be too high for them to be entitled to any tax credits, that could cut across the claimant's entitlement. Awards will be finalised at the end of the year once all the relevant details about income are known. But if no award was ever made, there would be nothing to finalise.
The fact is that awards and payments under those awards are simply the vehicle for delivering support during the year. Entitlement is different. It depends on the underlying facts, some of which cannot be determined until the end of the year. But as the distinction was not clearly drawn by the provisions in the Bill as it stood, we decided that a number of technical changes were necessary and these were absorbed into the Bill in Committee.
I am happy to seek to rebut each of the detailed amendments moved by the noble Lord, but that would take some time. I invite the noble Lord, Lord Higgins, to say whether that would be helpful or whether, having made a general point, he is now content to withdraw his amendment.
Lord Higgins: My Lords, I thank the noble Baroness for giving way. In the interests of speeding up proceedings, it is certainly the case that, as she says, some of the points on income definition, and so forth, arise in later amendments. I was seeking to bring out the consequences of the Government's arrangements for the within-the-year and after the end-of-year situation, with which the amendments are primarily concerned, and to draw out the fact that there seems to be some inconsistency in policy between the tax credit arrangements and the normal tax arrangements. Under self-assessment one has a situation where there is a degree of anticipation.
Clearly, the Government feel that we must help those who suffer a fall in income during the year and who are somehow totally impoverished and in need of instant assistance rather than for that to be left until the end of the year. If that is the argument, it seems odd to make those arrangements for people who are being paid up to £50,000 per year and who seem unlikely to starve during the course of the year.
Essentially, as the noble Baroness rightly says, the amendments deal with the distinction between entitlement and award. I was seeking merely to bring out the inconsistency of approach by the Revenue to taxpayers as against tax credit receivers. That is why I
As regards the substantive point concerning people who earn up to £50,000, the noble Lord will rememberwe can debate later the question of MDRs and so forththat those who are sensitive to a sharp taper fall in the withdrawal of working tax credit are those with incomes around £10,000 to £15,000 per year, depending on size of family. From about £20,000 per year upwards, there is little effect on taper rates because whatever happens to their income does not affect their entitlement to the children's tax credit element of the child tax credit, because that is the old tax allowance.
Therefore, the asymmetry of tolerance, the £2,500, in practical terms is available only to those on modest incomes who are to some extent on the edge of the tax bands. Once people come off the taper of the main child tax credit and go on to the children's tax credit at about £18,000, £20,000, thereafter, whatever happens to their income, it remains the same until they hit £50,000. It is precisely because we want to encourage work incentives that we have opted for what I believe is the decency of the asymmetry which allows for those who see an increase in their income. Often, with a couple, he may be on a low income and for the first time she re-enters the labour market. If they were immediately clobbered by a full withdrawal of working tax credit or some element of children's tax credit, probably the first thing she would do would be to drop out of the labour market. That is the last thing we want to happen.
We recognise that there is a sensitivity to those effects, simply because people are on very low incomes. That is why we have the asymmetry between immediately responding to falls in income but allowing in the first year in which it occurs for a tolerance of the first £2,500 of earnings. However, in practice that tolerance does not apply because it makes no difference to people once they have run out of the conventional working tax credit and children's tax credit and they are on just that last element of children's tax credit, which runs from about £18,000 or £19,000 up to £50,000 before it finally tapers out. So, in practice that tolerance is targeted on those who have the lowest income who are most sensitive to changes in circumstances. That is why I believe that it is such a decent policy.
Amendment No. 17 to Clause 3(1) would reverse changes designed to make clear that a claim to a tax credit is needed each year. That amendment was needed because, once a proper distinction between awards and entitlement has been drawn, the requirement for a new claim each year is no longer implied by Clause 5, which used to provide that an award on a claim ended at the end of each tax year.
I mentioned that there was an inconsistency between certain provisions of Clause 5 and the fact that awards will, in fact, reflect decisions made by the board during the year. Those provisions were therefore removed from Clause 5 and replaced by new subsection (3), which makes clear that an award is brought to an end during the year only by a decision made by the board to terminate it. Amendment No. 23 would reverse these changes.
Amendment No. 18, the third of the quartet, would remove new subsection (2) of Clause 3, which has been inserted to make clear that, where the board decides not to make an award or to terminate an award, any subsequent entitlement is dependent on the making of a new claim. That makes clear that the position for second and subsequent claims during the year is the same as that for new claims.
Finally, Amendment No. 19 would remove Clause 3(4). That provision states that entitlement ends when a couple breaks up or a new couple forms. That is an important provision. Couples will make a joint claim to the new tax credits. If a couple ceases to exist, obviously the previous entitlement must end. It would clearly be wrong to remove that provision.
I think that those were the specific amendments on which the noble Lord wanted me to expand. If he wants me to describe any others, I am happy to do so, but I do not want to trespass on your Lordships' time if he thinks that unnecessary.
Lord Higgins: My Lords, I am not clear whether all the other amendments are concerned with overpayments and underpayments. I was rather worried by what the noble Baroness said in speaking to an earlier amendment about overpayments and underpayments. This set of amendments includes provisions for underpayments and overpayments as well, and I am not clear which concern entitlement as opposed to award and which concern overpayments and underpayments.
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