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Lord Higgins: My Lords, as always one is lost in admiration for the Minister's exposition on these issues. I was contemplating whether, when the Treasury takes over the whole of the Department for Work and Pensions, the noble Baroness will just about be ready to become Chancellor of the Exchequer—the first one in this House for a very long time.

Be that as it may, I understand the case for asymmetry. It is fundamental to the basis on which this system of so-called tax credits has been established. I am still not clear whether taxpayers not in receipt of tax credit will be fairly or unfairly treated. However, one can return to that point at a later stage. It may arise on subsequent amendments. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Higgins moved Amendment No. 26:

The noble Lord said: My Lords, this amendment is part of a large group which we thought it appropriate to table so that we could raise the matter on the Floor of the House. In Committee, the Minister categorised the various amendments into five groups. These amendments seek to replace the relevant income provisions in Clause 17, although Amendment No. 26 affects Clause 7. That places them in category three.

We have just debated the relevant income definitions but we are not entirely clear why in Committee the Government wiped out the definition in Clause 17. The difficulty is that the reference in Clause 7 reappears—rather like the smile on the face of the Cheshire cat in Alice's Adventures in Wonderland, after the cat itself has disappeared. Could the noble Baroness explain why the Government feel that the original reference to relevant income in Clause 17 ought to be knocked out?

Lord Freeman: My Lords, will the Minister confirm that because tax credit entitlement is based on the previous year's income—I entirely accept the point about asymmetry—unless the Inland Revenue becomes aware of the fact that there has been an increase in income during the course of the current year of entitlement to tax credit, the proposed 2,500 threshold would effectively be lost the next year? That year will rely on the previous year's income, which may have risen more than the 2,500 threshold. If that is not disclosed and no adjustment is made to reduce tax credit, the benefit of that threshold will be lost.

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Baroness Hollis of Heigham: My Lords, the 2,500 threshold does not continue in perpetuity but only from the previous year. Normally, the individual's P60—which reflects his income in the current year—will form the basis of the following year's tax credit. The current year's P60 will include the rise in income of 2,500, 2,495 or whatever. I was making the point that the rise is not taken into account in the current year in which the income increases. As a result, the individual will not see a reduction in his tax credit in the current year.

Lord Freeman: My Lords, that is helpful but does not entirely answer the point. The P60 is issued at a specific point in time, shortly after the end of the tax year, and further adjustments may be made in relation to the past year.

Baroness Hollis of Heigham: My Lords, the noble Lord, Lord Higgins, is right that Amendments Nos. 26 and 27 are, in a sense, an aberration because they refer to "in this Part". That is done so that the changes affect the correct part of the Bill, not just the clause.

Lord Higgins: My Lords, does "in this Part" mean "Part" with a capital "P"?

Baroness Hollis of Heigham: Yes, my Lords, that is correct, rather like upper and lower case in "Inland Revenue". The substantive amendments are Amendments Nos. 45 onwards, which relate to Clause 17 and do exactly as the noble Lord said. Although it is helpful to have the concept of relevant income in Clause 7, one needs to specify in Clause 17 whether the reference is to this year's income or last year's income in assessing the individual's entitlement to tax credit. That is the reason for using in Clause 17 the terms "current year income" and "previous year income", not just "relevant income".

The expression "relevant income" is defined in Clause 7 and used in Clause 17. We are separating that expression into its two component parts of "previous year income" and "current year income" in Clause 17 because that is a more illuminating way of helping claimants to get the right tax credit.

Lord Higgins: My Lords, I asked whether "in this Part" meant "Part" with a capital "P" because there are two parts to the Bill. If so, I am not clear why the change does not apply to both parts.

Baroness Hollis of Heigham: My Lords, we need to clarify the terms for the purposes of the whole of Part 1, not just Clause 7. It has nothing to do with whether the terms are used in Parts 2 and 3 because they are not and never have been. They are simply not relevant to the rest of the Bill.

Earl Russell: My Lords, am I correct in thinking that in the Bill, "Part" is a term of art?

Baroness Hollis of Heigham: Probably, my Lords.

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Lord Higgins: My Lords, I am grateful for the Minister's clarification. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 27 not moved.]

Lord Higgins moved Amendment No. 28:

    Page 6, line 6, leave out subsection (8).

The noble Lord said: This is a topsy-turvy amendment—and is not the least thing topsy-turvy in the Bill. The subsection states:

    "Regulations may for the purposes of this Part make provision . . . as to what is, or is not, income, and . . . as to the calculation of income".

The Minister helpfully provided a number of draft regulations, so we know what the Government are likely to have in mind when the Bill is enacted. That precedent might well be followed in another place. No one there goes to as much trouble as the noble Baroness to provide draft regulations.

The power in question is rather wide but I assume that it applies only to tax credits, not to income tax. I do not remember any such provision in income tax legislation, giving the power to decide what is and is not income. What do the Government have in mind, at least in the initial stages, for the calculation of income? That crucial point can fundamentally affect the way in which the Bill operates.

6.30 p.m.

Earl Russell: My Lords, some power of this kind is needed. I am sure that the Minister remembers a great many discussions about CSA matters pointing out that former husbands have developed a remarkable skill in classifying things as not being income which might appear to the untutored eye to be income. So such a power is needed.

The question of what is capital and what is income has given rise to a good deal of debate. What is the income of a company and what is the income of one of its employees or directors is a matter on which there is a good deal of room for obfuscation. These matters must be cleared up somehow. Since the ingenuity of man when it comes to tax evasion is almost infinite, the need for flexibility—constantly invoked by Ministers—is a point which, in this case, even I must concede.

What I have been thinking about the question of flexibility and regulation is that sometimes we need not to object to the regulation-making power as such but to demand a tighter drawing of the vires under which the regulation-making power exists. There is an increasing tendency in drafting the vires to make regulations not to confine oneself to saying that one wants to take a power to deal with the particular problem that one has on the stocks, but, just in case something might turn up that one has not foreseen, to make the power as wide in extent as it possibly can be. I wonder whether the Minister might make some

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provision for tightening the wording of these vires to see whether they can be more specific to the mischief which I agree we have to meet.

Baroness Hollis of Heigham: My Lords, there are two questions here. One—which was rightly pursued by the noble Lord, Lord Higgins—relates to what assumptions we are making about what counts as income. The second relates to the need for what may be called the "topsy-turvy" clause to deal with the fallibility of human nature—which is one way of describing what the noble Earl, Lord Russell, referred to.

As regards the definition of "income", it may help if I explain where we have arrived in our thinking. The definition will broadly be based on annual income which is taken into account for income tax. It will therefore include earnings from employment or self-employment, certain social security benefits and pensions and "other income" from savings, property, trusts and overseas sources, in line with the definition of such income in tax law.

I also point out that the Inland Revenue was working with interested groups in drafting the relevant regulations. These groups include not only what may be termed low income groups—CPAG, NCOPF, the lone parents' organisation, NACAB, the Disability Alliance, the Low Incomes Tax Reform Group, the Low Pay Unit, and the Women's Budget Group—but also the Chartered Institute of Taxation and the Institute of Directors, which includes accountants. In other words, with a very wide group of organisations we are refining our definition for regulation purposes of what counts as income. But basically we are following income tax rules.

The second point related to the "topsy-turvy" element. As the noble Earl, Lord Russell, said, in terms of social security I have been amazed at the number of people who run Porsches apparently on 90 a week, because the rest of their income is turned into other forms. I hope the House will allow me to repeat an obvious example that I have given previously. Someone may lend someone else a sum of money—3,000, which is the capital sum—and it may be repaid on a weekly, fortnightly or monthly basis. But for this rule, that could technically be regarded as income—which it is not; it is the repayment of capital. Equally, people leaving prison will receive a modest lump of a couple of hundred pounds to settle them. We do not want that lump sum to disqualify them from entitlement to income support or JSA according to their circumstances. So that is the nature of the rule. It is benign, but behind it lies not only the basic income tax rules but full consultation with a wide range of organisations leading to regulations which will be available to this House.

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