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The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Hollis of Heigham) rose to move, That the draft regulations laid before the House on 9th July be approved [35th Report from the Joint Committee].
The noble Baroness said: My Lords, it may be for the convenience of the House if I deal with the first of the four sets of draft regulations on the Order Paper
together with the third set dealing with income thresholds and determination of rates. I understand that it may be convenient for the Opposition Benches if I do soand similarly, if I take together the second and fourth sets of regulations on the Order Paper, those dealing with entitlement and maximum rate and the child tax credit regulations.The regulations dealing with the definition and calculation of income define what is income for the purposes of claims to the new child tax credit and the working tax credit.
For the new tax credits, income broadly corresponds to income from taxable sourcessuch as earnings from employment and self-employment, certain social security benefits and income from a variety of other sources such as savings and investments, property, overseas income and income from trusts and estates. We believe that this provides a fairer measure of income which is more closely aligned with the income tax rules.
Perhaps I may briefly outline the main features of the draft regulations. Draft Regulation 3 sets out the steps to be taken in working out the total income of the claimant (or claimants) to be reported in tax credit claim forms.
Draft Regulations 4 to 12 set out in detail the extent to which various categories of income are taken into account in calculating a claimant's total income for tax credit purposes. These include employment income, as well as income from self-employment, pensions, taxable social security benefits, income from property and income from most savings and investments. With the last of these, it is taxable income from capital that claimants will have to report rather than the capital itself; we also propose to disregard income from various tax-exempt savings vehicles such as ISAs or some tax-free National Savings products. We believe that this will help low-income individuals in receipt of tax credits to build up the level of their savings.
Draft Regulations 13 to 17 are, in large part, anti-abuse provisions.
Draft Regulation 14 deals with cases where, under tax law, capital is treated as income and is taxable as suchfor example, when individual shareholders receive a "stock dividend"that is, new sharesinstead of the normal cash dividend. I should emphasise that we are not necessarily dealing with avoidance in this category. Secondly, the regulation also covers cases where income is diverted from one person to another through a trust or settlement, in which event the income is treated as remaining in the hands of the first person.
Draft Regulations 15 to 17 are based on the existing rules used in the working families' tax credit and the disabled person's tax credit system, which are a long- standing feature of the social security system. They seek to ensure that no one deliberately deprives himself or herself of income, or fails to apply for it, which could have had a bearing on his or her entitlement to tax credits.
Draft Regulation 18 brings other taxable miscellaneous income into account for tax credit purposes.
Finally, draft Regulation 19 provides for various disregards from the calculation of income in tax credit claims. One such disregard is that of maintenance received by single parents. I am sure that noble Lords will be pleased to see that they receive the credit unabated by any of the taper of the working families' tax credit or the child tax credit. This continues the existing practices under the working families' tax credit.
These draft regulations have been subject to detailed consultation with various outside bodies, which have made a valuable contribution to making sure that they fit the purposes of the Act.
I turn to the draft regulations dealing with income thresholds and determination of ratesthose which I suggested to the noble Lord, Lord Higgins, combined algebra with Esperanto. I am sure that he now thinks that they are a model of clarity. This is a set of technical regulations containing the detailed rules setting out how the amount of tax credit due is calculated in each case. The regulations also set out the income thresholds below which a claimant would receive the maximum amount of each tax credit.
Although these regulations are technical, the substance of them was announced by my right honourable friend the Chancellor in his Budget. For instance, my right honourable friend announced that working households with an annual income of £5,060that is a real figure not a notional onewill receive the maximum amount of working tax credit to which they are entitled. Similarly, families will receive maximum child tax credit if annual income is £13,230 or less. This is provided for by Regulation 3.
In the Budget we also provided details of how the new credits would respond to changes in income. Any claimants with less income in the current year compared with last year will have their final entitlement based on their current year income. On the other hand, a claimant whose income rises in the current year may also have his or her award based on current year income, but only when their current year income exceeds the previous year's by more than £2,500. There is no cliff edge. It is only at that point that it is taken into account. It is designed to give head space and not to discourage people from increasing their income in the course of the year.
We have also made it clear that recipients of safety-net social security benefitssuch as income support and jobseeker's allowancewho are responsible for children will automatically receive the maximum rate of child tax credit for the whole period during which they are receiving them. They will not be subject to a further income test in tax credits while they are receiving one of those benefits. This is provided for in Regulation 4, which prescribes income support and income based JSA as the safety net benefits.
The remainder of the regulations set out the manner in which the rate of tax credits should be calculated when income exceeds the thresholds and the taper
rates must be applied. These provisions are set out in a formulaic manner to show precisely how the tax credits system will calculate the rate in any particular case.Claimants themselves will not have to grapple with these technicalities. The detailed calculation will not be sent out to claimants as a matter of course, although they will be able to request a copy if they wish. The calculation will be done by the Inland Revenue, which will be able to talk claimants through the calculation if they so wish.
I am happy to explain in further detail how the calculations are donein other words, to seek to gloss the regulations. If your Lordships want me to do so, it may be better if I do so in summing up. What is happening may be clear from what I have said, but I am perfectly happy to expand on how the calculations are done if the House would think it helpful; equally I could at this stage leave it to noble Lords to decide whether they wish to press me further on this matter. As I see no great enthusiasm for greater description at this point, with those comments I seek the assent of the House to the regulations. I beg to move.
Moved, That the draft regulations laid before the House on 9th July be approved [35th Report from the Joint Committee].(Baroness Hollis of Heigham.)
Lord Freeman: My Lords, the Minister referred in her helpful introductory remarks to the fact that claimants will not have to grapple with the detail of the calculations. I wish to refer the Tax Credits (Income Thresholds and Determination of Rates) Regulations 2002 and draw the attention of the noble Baroness to the problems that will arise and which will need to be watched carefully if a family's circumstances change halfway through the year and there becomes, after the end of the tax year, an obligation to repay tax credits. These are dealt with in Regulations 7 and 8 of the set that I have referred to.
The problem arises because two different bases of calculations are used. During the course of the tax year, time apportionment applies in calculating the prospective credit to be paid if a family's circumstances change. At the end of the tax year, averaging takes place, which may give rise to an overpayment of tax credit and therefore a requirement to repay.
I do not intend to labour the point, but I shall give a simple example of a couple in which one party is working 16 hours a week and earning only £10,000 a year. They have one child. Their yearly entitlement to tax credits is £3,186, I believe. Half way through the year, on 5th October, the other member of the couple gets a job and starts to earn £30,000. The couple's joint income for the tax year becomes £25,000half a year at £30,000 plus the remaining £10,000 earned by the first member of the couple. The couple will lose entitlement to all credits except the family element of £545. For the first six months of the tax year their income was only £5,000 and they would have been paid credits of £1,593. When they are sent their end of year notice under Section 17 of the Tax Credits Act,
they will be notified of an overpayment of credits of at least £1,320, which will be reclaimed, because their total income for the year is averaged out.Apart from the fact that that appears manifestly unfair, claimants will not realise that getting a job part way through the tax year can result in the recovery of tax credits for a period when their income was low.
That aspect of the regulations needs to be looked at. At the appropriate time, when details of how the new tax credits are working in practice, your Lordships should return to the subject and press a resolution of the conflict between time apportionment and averaging.
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