Clause 7 - Income test
Tax Credits Bill
6:45 pm

Photo of Professor Steve Webb

Professor Steve Webb (Northavon, Liberal Democrat)

I beg to move amendment No. 65, in page 5, line 10, leave out from 'means' to end of line 23 and insert

'current year income or previous year income as prescribed in regulations.'.

This is the nub of the Bill for us in relation to people's entitlements. Clearly, fraud is an important issue and I know that Conservative Members will seek to raise it. We are particularly interested in the way in which the measurement of income will work. I had to read subsection (3) many times and I still do not really understand it.

Photo of Professor Steve Webb

Professor Steve Webb (Northavon, Liberal Democrat)

That is reassuring assent. However, I am concerned about the way in which it appears that it will work in a number of respects.

We are glad that the Minister has had discussions with such groups as the Child Poverty Action Group. Its presumption had been that assessment would be based on the previous year's income. The beauty of that system is that the income is knowable, so the danger of underpayments and overpayments is much diminished. I think that it would be fair to say that members of this client group are not necessarily the greatest record keepers. I do not mean that in a patronising way, but they have not needed to be. Typically, they do not file annual tax returns, and those who do have found the record keeping responsibilities to be a bit more of a stretch. If we require folk on much lower incomes and in much more variable circumstances to do the amount of record keeping that will be necessary to present not only a previous year's income but a plausible estimate of the coming year's income, we shall be asking a great deal. The better model that the amendment seeks is a presumption that the previous year's income would be the norm, and regulations would then prescribe circumstances in which the previous year's income

might not be used. I shall give the Committee a few examples to show where that presumption might not be appropriate and to stress that we would prefer the previous year's income to be taken as the norm.

Clearly, in income support or JSA cases one would want the circumstances to be updated immediately. A person may have lost his job, so it would not be right to look at last year's income from earnings; they would want to go straight to the current year's income. One would also want notified straight away any big change in the family composition, such as becoming a lone parent or the birth of a first child. If there were big changes in income beyond the threshold, one would want to start looking at the current year's income. In the case of a change in hours that goes across a 16-hour or 30-hour threshold, one might want to go to the new year's income. But beyond those dramatic changes in the family circumstances, it seems a much better route simply to use last year's income, which is knowable and known, for which there is no scope for error and which will be on the P60 anyway. That is the principle behind the amendment, which leaves out subsection (3).

I have one concern about the subsection that I should like the Minister to clarify, as, if left in, it could have an anomalous effect. The provision seems to say that if income has gone up by less than a threshold, we go on using the previous year's income. If it goes up by more than a threshold, we use the previous year's income plus the amount of the increase—not the whole amount. If we use the whole amount, there is huge

discontinuity. However, the paradox with that approach a year on is that, if nothing has changed, the previous year's income will include not just the income for the year before that plus the bit above the threshold, but the width of the threshold as well.

If that is as clear as mud, I could illustrate it for the Minister with some figures, but a disregard effect seems to be at work in subsection (3). If income has gone up beyond the threshold, the width of the threshold is disregarded in the assessment and only the bit above the threshold is assessed. Will that disregard continue a year on from that or will the system suddenly say, ''Hang on a minute. You've got that income. Now we shall start using it for this part of your income''? That could create a jump, especially if the threshold was big. Again, NACAB suggests that a threshold of £2,000 might be appropriate for changes in the other direction.

If subsection (3) remains in the clause, an anomaly could arise, unless I have misunderstood it. We would prefer a presumption based on the previous year's income and then for circumstances to be prescribed in which the current year's income would be used instead. We believe that that would be a simpler system—although I have not presented it as such—than that contained in subsection (3).

Debate adjourned.—[Mr. Sutcliffe.]

Adjourned accordingly at two minutes to Seven o'clock till Thursday 17 January at half-past Nine o'clock.