Clause 27 - Overpayments
Tax Credits Bill
5:00 pm

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Professor Steve Webb (Northavon, Liberal Democrat)

I beg to move amendment No. 67, in page 18, line 44, at end insert—

'but such a decision may only be made after it has been finally determined (on appeal or otherwise) under subsection 27(2A) that the excess if recoverable.'.

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Mr Nigel Beard (Bexleyheath and Crayford, Labour)

With this it will be convenient to take amendment No. 68, in page 18, line 45, at end insert—

'(2A) For the purpose of subsection (1) above, an excess is only recoverable if it is determined that, whether fraudulently or otherwise, any person has misrepresented, or failed to disclose, any material fact, and in consequence of the misrepresentation or failure an excess was paid.'.

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Professor Steve Webb (Northavon, Liberal Democrat)

The amendments are a pair. They deal with overpayments and recovery of overpayment of tax credits. They would clarify the scope of recovery and the circumstances in which overpayment would be recovered.

Under social security legislation, overpayments can be recovered if someone is found to have failed to disclose or to have misrepresented a material fact. We wonder whether similar provisions—which we cannot see in the Bill—will apply to tax credits.

Amendment No. 67 would define a category of excess payments that are recoverable by reference to a new subsection (2A), which is introduced in amendment No. 68. It determines that overpayments are recoverable, whether there has been fraud or—I hesitate to use the word ''wilful''—misrepresentation or deliberate failure to disclose. The genesis of the amendments is the problem of people who have to forecast their incomes. When someone's income from a previous year is recorded on a P60, there should not be problem. At the end of year, no reassessment

should be necessary, because that person's income in the previous year is historical fact, and will be known to the Revenue through the P60. However, if the person had to estimate his income in the current year, or if a change of circumstance has affected his entitlement, resulting in overpayment, what will be the scope for recovery of overpayment?

One case that springs to mind, for the purposes of the working tax credit, is of someone who is on the border of 29 or 30 hours, or 15 or 16 hours. Given that such matters will be determined on the basis of an annual average of hours worked, or the weekly equivalent of the annual average, it would be extraordinarily easy for someone to incur an overpayment, through no fault of his own, because he did not average his hours accurately. Consequently, he would find that a substantial overpayment could arise. For a single person who has to work 30 hours to get anything, who is in low-paid work and who therefore receives a generous tax credit, the amount of overpayment could easily be in excess of £1,000 for a year.

The amendments establish the circumstances in which there will be an attempt to recover overpayment. Will recovery be sought only when there has been fraud and deliberate misrepresentation, or will the Government try to recover money when there has been an accidental failure, or when someone's estimate of annual income is incorrect? The amendments are intended to mirror the social security provisions for recovery of overpayments. We hope that the Government will accept the amendments on that basis. Alternatively, will the Minister clarify any differences in the principles that will be applied to overpayments of tax credits?

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Mr Paul Boateng (Financial Secretary, HM Treasury; Brent South, Labour)

I am grateful to the hon. Gentleman for his careful explanation of the amendments. I well understand his concerns. We have rightly debated at length the way in which the new tax credits system is designed to provide continuity of awards, with the capacity to adjust awards to reflect the changing needs of claimants. In particular, we have discussed the way in which the system will work in relation to changes in circumstances during the course of an award, and therefore the flexibility that clause 7 engenders in dealing with responses to income change. One key part of the work to be done on decisions about thresholds under clause 7, which I know is of great interest to the hon. Member for Northavon (Mr. Webb), will concern scope for overpayments of tax credits. To a certain extent, decisions made during the formulation of regulations on thresholds will have some bearing on the outcome of the scenarios that he described. He will understand why I do not intend to go down that road this afternoon.

Amendments Nos. 67 and 68 relate to the circumstances in which the Inland Revenue would be entitled to recover an overpayment of tax credit. By importing wording from social security legislation, they would limit those circumstances to cases in which there has been a failure to disclose a material fact or misrepresentation. In a previous sitting, we had a discussion instigated by the hon. Member for Northavon about the extent to which the provisions

would reflect elements of both social security and tax legislation. Elements have undoubtedly been taken from both, but the whole is, and is intended to be, very different from that for social security benefits.

The provision that he described made a lot of sense in relation to social security benefits but would not be appropriate for the proposed system. As I said, claimants to new tax credits will have access to guidance and support through a variety of means to help them decide when they should notify the Revenue of a change that might affect their entitlement to tax credits. It is in no one's interest for people to run up debts that they will subsequently find difficult to repay. On the other hand, we do not want to impose obligations across the board for notification of changes when there will be a substantial number of people—for example, those who receive only the family element of child tax credit—for whom major changes would not affect their award. Why should we put them to the bother of notifying a change?

As I have said on numerous occasions, we must strike a balance. We want to minimise the scope for overpayment of tax credit through support offered to claimants and the type of regulations that will be made under earlier clauses. When awards are reconciled at the end of the year, some people will find that they have been paid too much tax credit with no fault on either their part or the Revenue's. In some cases, people may decide to wait until the end of the year before they finalise their entitlement. Provided that they have told the Revenue all that they should have done, that is fine and it is their choice.

It is only right and fair, however, to other recipients of the credit that the Revenue should be able to recover overpayment, just as it would pay out extra tax credits that were due. The same principle applies when the Revenue recovers tax that has been underpaid with no fault on either side. We have all been through that process. Some years we get something; other years we find ourselves paying more. It would not be right to constrain the Revenue as the amendments would.

The hon. Member for Northavon gave an example about hours worked and the annual average. The system would not work in that manner. Entitlement will be based on current non-financial considerations and income will be assessed annually. That is not a question of averaging out in the way that he suggests. People who worked 30 hours a week for the first six months of the year, would receive the 30 hours credit. That would not be clawed back, even if they did not work during the latter six months of the year. We make no attempt to average that out: people receive the credit when it is due. If they stop work or undertake fewer hours, they are not subject to clawback.

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Professor Steve Webb (Northavon, Liberal Democrat)

I am grateful to the Minister. That is a helpful clarification for someone whose life is so clear cut that they work 30 hours a week for six months in a year. For a single childless person, 30 hours is the difference between zero and entitlement, which is a big cliff edge.

What about people whose life is more random? Some weeks they may have an extra shift, or overtime.

In extreme cases, let us suppose that they do 30 hours one week and then 25 hours the next. What do they do?

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Mr Paul Boateng (Financial Secretary, HM Treasury; Brent South, Labour)

Their entitlement will be based on their current financial circumstances. At the end of the year, if the reconciliation is such that some overpayment has been made, the provision will apply. That will be subject to regulations and thresholds. Short of accepting the sort of benefit model that the hon. Gentleman suggests, that cannot be avoided.

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Professor Steve Webb (Northavon, Liberal Democrat)

I am glad that the amendment deals with the problem that I raised.

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Mr Paul Boateng (Financial Secretary, HM Treasury; Brent South, Labour)

That is not always the case.

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Professor Steve Webb (Northavon, Liberal Democrat)

The Minister said something that confused me. He mentioned the end-year reconciliation and referred to thresholds. However, thresholds concern variations in income, not absolute entitlement. The Minister seems to be saying that at the end of the year, people may find that the Revenue identifies weeks in which they were not entitled.

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Mr Howard Flight (Arundel and South Downs, Conservative)

The hon. Gentleman is hitting on the central problem of the lack of definition of what ''hours worked'' means. If it is defined as average hours per week during the tax year, the meaning is clear. For someone working 25, 30, 35 and then down to 25 hours a week, that averages out or it does not. As the Institute for Fiscal Studies pointed out, a major weakness of the Bill is the lack of clarity about that definition.

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Professor Steve Webb (Northavon, Liberal Democrat)

I suppose that it has been decided that the amount will not be averaged and that there will be some notion of what ''current'' means. Until we see the regulations, we will not know what the definitions are.

I am worried about the mixed messages from the Government on how often they want people to contact the Inland Revenue. The Minister said that the Revenue does not want to hear from those on higher incomes who receive only the children's tax credit. Wild fluctuations in their incomes will not make a difference to their entitlement. However, people whose hours are fluctuating will have to be on the blower every week. The entitlement of people who do a shift one week but not the next depends on their current circumstances. Under the current circumstances eligibility rules, if those people do not want to fall foul of the overpayment provisions at the end of the year and face a possible £1,000 repayment, they must report all those changes all the time. There is tension here. In the case of income-based assessment, someone can assess their income by performing an end-year reconciliation by comparing their forecast with what happened.

Claimants have to understand that if they are in the higher income band, changes to their income do not matter, but changes to their circumstances—marital status, hours and the rest of it—do matter. If they are in the lower income band, they should immediately report all changes so that a reassessment can be undertaken. I worry about how that will work. Employers are employing people whose hours will

vary, because that is the nature of their work. The board will require those employees to pay a tax credit one week but not the next if they do not satisfy the qualifying hours.

We have come a long way from annual assessment. This is a muddle that has nothing to do with the claimant, but with the uneasy marriage of current circumstance-based assessment and annual income-based assessment. They do not fit well together and we should revisit the issue. There will be problems even when the scheme is up and running. We are worried that people will receive money that is demanded back at the end of the year, because they did not report every shift. Such people will end up being penalised, possibly substantially.

The wording of the amendment and the attempt to mirror social security legislation may not be exactly what is required, but I have grave concerns about people who run up overpayments. The Minister has not greatly reassured the Committee so far that those people will be looked after properly, given the onus that is being placed on them to understand the different reporting rules.

5:15 pm
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Mr Paul Boateng (Financial Secretary, HM Treasury; Brent South, Labour)

As I said, I well understand the hon. Gentleman's concerns. We share a determination and an interest in ensuring that people do not find themselves moving in and out of entitlement. He described the Government's approach as an ''uneasy marriage''. That is not fair, but I do not underestimate the technical challenge of the route that we have taken, which is designed to avoid the possibility of people moving in and out of entitlement and to give people income when they need it to tackle poverty and to encourage them to advance themselves through work.

We seek to meet those objectives in a flexible and understandable way. That is technically challenging, and that is why we are engaged in detailed discussions with those with an interest in this area to ensure that we get it right technically, so that people can get advice when they need it about how best to safeguard their interests. The outcome of those discussions has not yet been finalised in regulations. We are considering the hours that people usually work and not a 12-month average.

That is the best way of meeting our shared objectives. We do not want to impose on people across-the-board obligations that attract penalties. We want to ensure that people get in touch when they need to and to avoid the hazard that the hon. Member for Northavon illustrated. We are working closely with the stakeholders who have the greatest interest in this and we believe that the regulations will demonstrate that we have achieved that objective.

We hear what the hon. Gentleman says. We are working on it. The regulations will reflect that. I do not believe that the Bill is any the weaker. On the contrary, it is stronger because we are discussing it and are engaged in careful reflection and negotiation with those most intimately concerned about how to overcome those technical challenges. I hope that with that assurance the hon. Gentleman will not push the

amendment to a vote. We understand what he is getting at, but we do not believe that the answer is to return to the social security model. We recognise that there is a problem and we are trying to resolve it.

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Professor Steve Webb (Northavon, Liberal Democrat)

I am grateful to the Minister for the spirit in which he responded to the amendments. He says that this problem is technically challenging. Indeed, it is. If it is technically challenging for the combined brains of the Treasury and the Inland Revenue, what will it be for the claimant? If it is so difficult to draw up rules that will embrace all the possible changes in circumstances, how can we come up with something that will prevent claimants—due to no fault of their own—running up overpayments that have to be recovered? We are trying to say yes in the case of fraud and failure to disclose material facts. In those complicated changes of circumstances at the margins, however, there should not be a presumption that overpayments will be reclaimed.

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Mr Paul Boateng (Financial Secretary, HM Treasury; Brent South, Labour)

A television is a technically challenging invention. People worked long and hard to create that form of broadcasting. It is simplicity itself to turn on and off, once one has got over the cultural predisposition to have it on all the time, which my hon. Friend the Member for Warrington, South (Helen Southworth), who sits silently behind me, clearly shares. Despite the technical complexity of the instrument, once it is in place it is simple. My hon. Friend the Paymaster General pointed that out clearly and succinctly last Thursday. The whole point of this provision is to get the legal context right so that the regulations and explanatory documents that we will have available at our surgeries will enable people to access the help that they need when they need it.

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Professor Steve Webb (Northavon, Liberal Democrat)

I am grateful to the Minister and I hope that he is right. I hope that once the wits of the Treasury and Inland Revenue have got together he can design some streamlined amendments that are straightforward for the claimants. I still have reservations. In answer to my query about someone working 30 hours, 29 hours, 30 hours and so forth, he said that it was the normal hours in the current circumstances that mattered. Normal implies some sort of short-term averaging. Clearly a snapshot of one week is not what is meant; it must take one week with the next and perhaps one month with the next. That immediately leads us to issues of reporting and what people have to say.

I am trying to knock this on the head. We have a couple more sets of amendments on overpayments, so I will not pursue this amendment any further. I am grateful that the Minister says that these matters continue to be considered. I trust his assurances that he will come up with some streamlined regulations to deal with my concerns. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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Professor Steve Webb (Northavon, Liberal Democrat)

I beg to move amendment No. 116, in page 19, line 13, at end insert—

'(6) No overpayment of tax credit may be recovered under this section or under section 28 until after the Board has laid before both Houses of Parliament a statement of its policy in respect of the operation of the sections following consultation on a draft of that statement.'.

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Mr Nigel Beard (Bexleyheath and Crayford, Labour)

With this we will consider clause stand part.

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Professor Steve Webb (Northavon, Liberal Democrat)

Here we are again.

The Low Income Tax Reform Group and other organisations have expressed reservations about the recovery of overpayments. Amendment. No. 116 is intended to prevent the powers under clause 28 from being exercised until the board has told people what to expect with regard to the recovery of overpayments.

One of my worries about the Bill is the loss of certainty. Working families tax credit may have had its problems and inflexibility and lack of responsiveness may have been among them, but that lack of responsiveness lasted for only six months. However, the National Association of Citizens Advice Bureaux and other organisations have suggested to us that claimants valued the certainty of that tax credit; they knew what they were going to get for six months.

I understand that a balance must be struck between the conflicting qualities of responsiveness and certainty, but what concerns me and organisations that deal with people on low incomes is that uncertainty might hang over such people; they might worry that at the end of the year the reassessment will leave them out of pocket, and that it might be decided that overpayments should be recovered from them.

That uncertainty is inherent in the sort of system that we are discussing. People ought to be informed of the sorts of circumstances in which overpayments will be recovered—it might be possible to do that when they make a claim, by handing them a sheet of paper that lists such circumstances. They should also be informed about the mechanism by which that overpayment might be recovered. If, at the end of the year, someone found out that they owed a few hundred pounds, they should know in advance how that would have to be repaid—as a lump sum, for example, through the tax code, or through underpayment of future tax credit—and how that decision would be made. That matter links in with the next clause.

The amendment is not intended to prevent the exercise of the powers provided in the clause. It is intended to ensure that people know, before the powers are exercised, the criteria for applying them and their mechanisms and practicalities. That would give claimants a degree of certainty.

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Mr Howard Flight (Arundel and South Downs, Conservative)

Clearly, we cannot have such a vague and woolly system. Those who are entitled to tax credits should be required to follow simple rules that they can understand—regardless of whether those rules address every conceivable matter of fairness. If the rules are not easy to understand, people will either be put off applying, or they will make mistakes. The situation will be a mess.

Those rules also need to contain a fair and firm system for the return of overpayments. If that system is loose and woolly, people will exploit it to the maximum. Logically, the system should operate in a similar way to the underpayment of income tax—but the other way around as, regrettably, people will probably be excluded from subsequent tax credits and

they will be required to make a payment if they no longer qualify for such credits.

To borrow the Minister's metaphor, if a black box—a television—was invented that would deliver a lovely picture if it was switched on, but nobody understood that it was a television or knew how to switch it on, I cannot see how it could operate. With regard to tax and tax credits, it is axiomatic that people should understand what they are—and are not—entitled to. They cannot have a dialogue with the Revenue—or with anyone else—unless that is the case.

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Mr Paul Boateng (Financial Secretary, HM Treasury; Brent South, Labour)

In our debates on amendments Nos. 67 and 68 and earlier clauses, we discussed overpayments that might arise as a consequence of the new fiscal tax credits, but through no fault of the claimant or the Revenue. I explained to the Committee that we want the tax credit system to adjust to meet changes experienced by claimants, but without it imposing a disproportionate burden on them or subjecting them to intrusive monitoring. We want people to receive what they are entitled to at the right time.

I return to the theme that has been characterised in my responses and those of my hon. Friend the Paymaster General. The Revenue will be providing guidance to ensure that that is so. It is inevitable, however, that when the final entitlement has been determined, some people will have been overpaid or underpaid for the year. People who have been subject to numerous changes during the year may choose to wait until the end of the year to sort matters out, while others may find that their income for the year, when finalised, produces a change in their entitlement.

When debating clause 7, we referred to the importance of any threshold that had been set under the regulations and the care that we are taking about the decisions to be made in such matters. People who have been underpaid will have the extra tax credit paid into their bank account. Overpayments of tax credit are dealt with under this and the following clause. Clause 27 establishes that there is an overpayment, while clause 28 provides for the means of recovery. No doubt Opposition Members will have views on that.

Clause 25 gives the Revenue the power to decide whether all or part of an overpayment should be recovered. It makes the claimant liable for that repayment. With joint claims, the clause makes both claimants jointly and severally liable. However, the Revenue may also decide that each partner should be able to repay a specified amount of that overpayment. Such a decision might be made when it was clear that the overpayment was the result of action by one partner, of which the other knew nothing. Overpayment arises when a final decision is made under clause 17.

There will be times, however, before the decision has been made, when it is clear that there will be an overpayment. For example, a claimant may have been receiving tax credits in respect of two children, one of whom has gone to live with someone else during the award. It may be some time before the Revenue is notified of that. The clause also allows payments to be adjusted to recover an overpayment in anticipation of

the final decision about the award. It is right that the Revenue should have that power, but we aim to ensure by advising and educating the claimant that the number of tax credit overpayments to be recovered is kept to a minimum. That is the reason why the information must be given, why the advice should be made available and why we should make the system as clear as possible for those who are to benefit from it. When overpayments arise, clause 27, together with clause 28, will enable the Revenue to deal with them fairly and sensibly.

Amendment No. 116 would require the Inland Revenue to consult on its policy about the recovery of an overpaid tax credit and to lay a statement before both this House and the other place. Only then will it be possible for the board to start recovering overpayments. I can well understand the objectives of the hon. Member for Northavon in tabling such an amendment, although I do not consider that its procedure is necessary or right. It is overly cumbersome and procedurally fraught. However, I understand what he is getting at and I assure the Committee that we shall continue to ensure that we take into account the worries that have been expressed by NACAB and others about the measure. That is why the Revenue plans to produce a code of practice on its compliance work in relation to new tax credits. It will also set out how it intends to exercise its discretion in the recovery of overpaid tax credits, provided for under clause 27.

So we will certainly consider and reflect the views of others in preparing that code. My hon. Friend the Paymaster General will be taking a close, personal interest in the Revenue's proposals. The code of practice will be made available in draft for comments, so there will be plenty of opportunity for NACAB and others to form a view. Indeed, there will be an opportunity for the hon. Member for Northavon and his colleagues to form a view as to whether the code is fit for purpose. The purpose of publishing it and making it available in draft for comments is to make sure that we get it right. As hon. Members on both sides of the Committee have said, even if one supports the objectives, the aims and the means of the legislation, one can honestly have different views about how best to achieve them. That is why we are making the draft code available for comments.

I hope that in the light of that assurance, and with the prospect of having a personal input into the thinking of the Revenue—[Interruption.] Well, it is an opportunity not to be sneezed at. I hope that the hon. Gentleman will feel able to withdraw the amendments.

5:30 pm
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Professor Steve Webb (Northavon, Liberal Democrat)

I am grateful and heartened by the mention of a draft code of practice. I am assuming that by that the Minister means that such a document would be publicly available before the Inland Revenue applies the powers. That seems to be the logic of what he is saying. It certainly goes some way towards addressing our concerns.

One hopes that once the code of practice is in force—perhaps I could sow this seed in the collective conscious of the Revenue—a summary version will be

available to recipients, perhaps once a year when they receive their annual reconciliation statement. That will give people the certainty that we are seeking. Heartened by the Minister's characteristically inclusive approach, I beg to ask leave to withdraw the amendment.

Amendment by leave withdrawn.

Clause 27 ordered to stand part of the Bill.