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Earl Russell : My Lords, that was a helpful reply, but has the Minister any response to the point about the need to draw the vires rather more tightly in the regulation-making power?

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Baroness Hollis of Heigham: My Lords, my instinct is "No", but perhaps I may reflect further on the matter to see whether I agree with the noble Earl's point.

Lord Higgins: My Lords, before the Minister sits down, we understand that there may be a need for regulations which enable the Government to vary the definitions of income and so on. The Minister referred to a particular item; namely, the repayment of a loan, which would not then be regarded as income. For the record, can she give us some idea of what the regulations contain in the first instance?

Baroness Hollis of Heigham: No, my Lords, I am afraid I cannot do that at the moment. They are still under discussion. All I would say is that the model that we are following was followed by the previous Conservative government when they introduced family credit, disability working allowance and other benefits. So far as I am aware, there has always been such a provision for exactly the purposes outlined by the noble Earl, Lord Russell. When the consultation regarding what is relevant income for these purposes has been concluded, I shall make sure that the noble Lord is notified of when the regulations will be available for inspection.

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

Amendment, by leave, withdrawn.

Lord Higgins moved Amendment No. 29:

    Page 6, line 13, leave out subsection (10).

The noble Lord said: My Lords, Clause 7(10) is concerned with the board making estimates. I found it a rather puzzling clause which it would be helpful to illustrate. The subsection reads as follows:

    "The Board may estimate the amount of the income of a person, or the aggregate income of persons, for any tax year for the purpose of making, amending or terminating an award of a tax credit; but such an estimate does not affect the rate at which he is, or they are, entitled to the tax credit for that or any other tax year".

That seems a rather strange provision.

The clause suggests that the board can estimate the claimant's income, and it will do so for the purpose of amending or terminating an award. In that case, surely it affects the rate at which it is entitled to the tax credit. The fact that it makes an estimate clearly does not affect the tax credit, but if it does make an estimate one would have thought that it was for the purpose of affecting the rate of entitlement to the credit. I do not understand for what other purpose the estimate will be made; nor do I understand why the board will make estimates if doing so has no such effect. I am puzzled as to the purpose of this part of the Bill. I beg to move.

The Deputy Speaker (Lord Elton): My Lords, I must tell the House that, if this amendment is agreed to, I shall be unable to call Amendment No. 30.

Earl Russell: My Lords, I thought that the Minister had explained this point in Committee. I believe that

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this relates simply to the system that is used for the assessment of Schedule D income tax. If you do it all afterwards, you have a very large sum falling due to be paid at some time when people may not have made provision for it and it can be quite difficult to meet. So, with Schedule D income tax, there is an estimate at the beginning of the year based on the previous year's earnings. If you earn less than that during the course of the year, your next year's liability is reduced. If you earn more than that—if, as sometimes happens, editors, publishers and the people who buy copyrights for reproduction in anthologies suddenly remember you in the last three months of the year, you find a whacking great tax bill which you were not expecting.

There are, of course, disadvantages in this system. I do not see how you can have a system without disadvantages. Granted that that is the case, this may be what the Minister would describe as rough justice; but it seems to me that, even when it works against me, it works about as fairly and as reasonably as any system that I could devise to replace it. Under those circumstances, I see no purpose in complaining. Furthermore, since it is already a tried and trusted system, it is one area in which the workings of the Bill will not involve substantial innovation. It is just as well that there are a few of those.

Baroness Hollis of Heigham: My Lords, the provision would not work against the noble Earl, Lord Russell, because over time it evens out lumpy sums—that is one of the phrases we were using. The noble Earl is right on the main argument; the amendment would remove the provision for the Inland Revenue to estimate a person's income for the purposes of the tax credit award during the year. We need to be able to do that because people's income may fluctuate during the course of the year; they may know that that is going to happen and we may want to take account of that.

Current year income cannot be known until the end of the year, so the system would not really be responsive if adjustments to reflect current year income were made only at the year's end. Those who needed more help because their income had dropped would be waiting until the end of the year for a lump sum payment of tax credits. In contrast, as the noble Earl, Lord Russell, said, those whose incomes had risen significantly would be overpaid and have to pay back much of that money at the end of the year. That clearly cannot be right if the overall aim is to give help to those who need it when they need it.

Subsection (10) therefore provides a mechanism for adjusting an award during the year based on an estimate or prediction of current year income. There will be no requirement to provide estimates of current year income as that would be impossible to enforce. So subsection (10) allows the Inland Revenue to estimate income in-year.

The question is, in what situations would the Inland Revenue wish to use that power as opposed to the self-reporting cases we have identified? First, as I have described, it could use it in response to a claimant providing an estimate—this is a benign version—of current year income because he thought his award

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would eventually be based on current year and he wanted it—as the noble Earl, Lord Russell, described—on the correct footing as soon as possible. The Inland Revenue will encourage claimants to do that.

Secondly, subsection (10) can be used by the Inland Revenue as a safeguard against those who deliberately try to abuse the system. Because current year income cannot be known until the year's end, it is not possible to take action against those who deliberately provide false income information until the end of the year. However, that false information may be provided in the form of an estimate during the year. In such cases the Inland Revenue could choose to use its own best estimate of income to protect the Exchequer from making the wrong payments during the year.

I could conceive of an example in which someone gave a false, artificially low statement of his income, received a high payment, then protected himself against overpayment the following year by going back on benefit. While on benefit he would have no such liability. In such situations, the Inland Revenue may seek to make an estimate of the person's actual income, based on its experience and information, rather than rely on manipulation of the claimant's information or fraud.

But I must point out to your Lordships that subsection (10) makes it clear that the board's power to estimate has no bearing on the final entitlement to tax credits. That will always be dependent on actual income and will be settled at the end of the year. The power at subsection (10) merely relates to provisional decisions during the year made under Clauses 14, 15 and 16.

There is no mischief here. It is a sensible way of making mid-term adjustments, but with the additional benefit that it can protect in the case of outrageous fraud, which I hope will be rare.

Lord Higgins: My Lords, I fear I have forgotten the exchanges in Grand Committee to which the noble Earl referred. That is possibly because I do not envisage myself being in the circumstances covered by the subsection—my publications are very limited—whereas those in receipt of royalties may be affected. The noble Earl may be affected for his distinguished publications, as indeed may be the Minister. They have more reason to remember the exchanges in Grand Committee than I do.

Earl Russell: My Lords, it is not the distinguished publications that bring in the money.

Baroness Hollis of Heigham: My Lords, that belief is held dear by every academic.

6.45 p.m.

Lord Higgins: My Lords, we must not get too personal. My wife's three-volume work probably comes under that category.

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I remain a little puzzled by the clause. I am not clear why the board rather than the individual estimates the amount. In one's self-assessment tax return there is a degree of estimation of one's likely income.

Baroness Hollis of Heigham: My Lords, that is exactly what happens. In the majority of cases the board will respond to information offered by the claimant.

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