Children's Tax Credit: Amount for 2001–02 and for Subsequent Years

Clause 52 – in the House of Commons at 8:15 pm on 24 April 2001.

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Question proposed, That the clause stand part of the Bill.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs 8:30, 24 April 2001

The Government may have forgotten that three or four years ago—unfortunately, the Chancellor's office arranged a little leak—the Select Committee on Social Security advised strongly against arrangements of the type that the children's tax credit represents, suggesting that such arrangements were ill-conceived and not the best way of helping children. Of course, an increase in the maximum receipt to £520 a year will be welcomed by those who qualify, but the principle of CTC remains flawed. It tends to benefit the lowest earners with children least; it is complicated and regressive in its interaction with working families tax credit; and it is unfair in that its impact on families with a single earner is different from its impact on families with double earners.

The proposed increase will, in many instances, reduce entitlement to working families tax credit, as well as creating yet more complexities and administrative problems for the employers who have been forced to administer CTC. The Chancellor himself has admitted that the arrangement is unsatisfactory by announcing that Labour would abolish it in future, and make it part of an integrated child care element—or rather that the child care element of working families tax credit would be replaced by an integrated child benefit.

As has been widely recognised, it is morally wrong for a child benefit to discriminate against single-earner couples. If the combined income of a working couple is £65,000—it may be £60,000; I have forgotten the precise figure—that couple are likely to qualify. If only one earner is involved, the couple will not qualify, although the same children are there to benefit. After tax, the single earner may have less than two earners receiving the same gross pay.

There is an administrative nightmare when divorced and separated parents and couples involving new partners come together to look after children. The Association of Chartered Certified Accountants, expressing the feelings of many, has complained that the application form is so complex that, for a number of people the task of completing it is too difficult, and they will lose out as a result. I believe that some 500,000 have failed to apply in time this year, and they are likely to be those most in need of support. Even the BBC news, that great organ of the Labour party, has admitted that citizens need a guidebook to work out what family tax credits they will be entitled to.

The Conservatives are pledged to review the position, to introduce a fairer and simpler child tax credit and to increase the cash benefits by a further £200 per annum in respect of children under five. We will set out in due course how we will do it. The principle of providing greater support to children must be right—I should declare an interest: I have four children. The cost of child rearing is a major burden. I go back to the cross-party Social Security Committee, which advised against trying to apply a means-tested approach. The mechanism is not working. The Government themselves admit that, in their proposals to make changes in due course.

Photo of Edward Davey Edward Davey Shadow Minister (Olympics and London), Shadow Spokesperson (Treasury), Liberal Democrat Spokesperson (Treasury), Liberal Democrat Spokesperson (Olympics and London)

Let me start by saying something that the hon. Member for Arundel and South Downs (Mr. Flight) did not say: it is welcome that more money is going to families with children.

Photo of Edward Davey Edward Davey Shadow Minister (Olympics and London), Shadow Spokesperson (Treasury), Liberal Democrat Spokesperson (Treasury), Liberal Democrat Spokesperson (Olympics and London)

I beg the hon. Gentleman's pardon. He corrects me from a sedentary position. I withdraw the remark. It is important to target extra money on families with children. This Government have done so, which has been a welcome change: the previous Government did not do so. It is worth acknowledging that, and putting it on the record.

Having said that—

Photo of Edward Davey Edward Davey Shadow Minister (Olympics and London), Shadow Spokesperson (Treasury), Liberal Democrat Spokesperson (Treasury), Liberal Democrat Spokesperson (Olympics and London)

There is; the hon. Gentleman from the Whips Office is right. The children's tax credit is a very complicated way of targeting money on families with children. Simplicity is of the essence in many of these issues. Let me explain how complex a system of child care support we have. We have child benefit, a children's tax credit, the child care tax credit and the working families tax credit. It is incredibly complicated. There is a plethora of forms and of civil servants and a range of guides, and the different tax credits operate in different ways.

Photo of Edward Davey Edward Davey Shadow Minister (Olympics and London), Shadow Spokesperson (Treasury), Liberal Democrat Spokesperson (Treasury), Liberal Democrat Spokesperson (Olympics and London)

The hon. Gentleman is right. It is not surprising that not everyone who is entitled to the children's tax credit is taking it up. It is so confusing. That is what happens when we have complexity.

As the hon. Gentleman rightly said, the Government have realised their mistake. They have realised that they have made the system complex, so they are going to get rid of the children's tax credit. We are debating an increase in the credit that has come into force only this month, when the Government have already announced that they will get rid of CTC by 2003. They have admitted that this was the wrong way to go about things. Although it is welcome that more money is going to children and families, this is not exactly the most effective way of governing. It suggests that there is a lack of strategic thought in the Treasury. The extra money is welcome, but the piling of change on change and the extra complexity leave one questioning the way in which the Government have gone about things.

Although it has been said before, and I am sure that the Minister is almost fed up of hearing it, it must be said again that some of the support mechanisms for families, particularly the working families tax credit, have imposed severe burdens on business. Small business in particular has been hit by the burden of administering the credit, which was previously administered in the form of family credit by the Department of Social Security. Businesses have effectively been asked to get involved with social security mechanisms. As a principle, that is not sensible.

As we consider the clause in the knowledge that the Government have those plans—and particularly as the clause increases the value of the children's tax credit—it is worth asking how they propose to get around some of the problems that they have created for themselves in not having a coherent strategy from the start. When they move to the integrated children's tax credit, if they do, it will, we are told, be assessed on household income—the incomes of both parents. The hon. Member for Arundel and South Downs made the valid point that a single-earner couple is discriminated against in the administration of the children's tax credit as compared with a dual-earner couple who have earnings below the higher-rate tax level. That lacuna in the current legislation will cause a problem when the Government introduce the integrated tax credit. A couple who both earn an amount just below that which qualifies for higher-rate tax, and who therefore receive the full children's tax credit, will have their incomes added together when they are assessed for the integrated tax credit and, unless the scale is increased significantly, they will lose a substantial amount of children's tax credit—and possibly all of it.

The Paymaster General is giving me one of her quizzical looks, which suggests that she may have thought of that point. If she has, I hope that she will enlighten the Committee further, because we have had no public announcement of how the Government intend to overcome that very real problem. Some families in that situation can benefit to the tune of £520 a year from the children's tax credit, and they will stand to lose a significant amount when it is integrated. If the Government try to take £520 a year away from such families, they will soon hear all about it.

I welcome the extra money for families with children, but—as the hon. Member for Arundel and South Downs said—more than 500,000 people who are entitled to the credit have not yet claimed it and will not benefit from the increase in its first year. The Paymaster General may have more up-to-date figures and I hope that take-up has increased. My party wants the take-up to be 100 per cent. and we hope that the Government are successful in achieving that, because no one wishes to see families with children denied money to which Parliament has decided they are entitled. However, the question is how we can ensure that those families with real financial problems are getting the credit, and that is an important policy objective for everyone. I hope that the Paymaster General will be able to tell us how the Government will be able to ensure that their extra generosity goes to the people who need it most.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

Clause 52 will increase the amount paid for the children's tax credit so that it is worth up to £520 a year, or £10 a week. My right hon. Friend the Chancellor said in his pre-Budget report last year that he was minded to do that, and he confirmed it in the Budget. The increase of £1.50 a week is the equivalent of a 3p cut in the basic rate of tax, and will be very important for those single-earner families on average earnings who will particularly benefit.

The hon. Members for Arundel and South Downs (Mr. Flight) and for Kingston and Surbiton (Mr. Davey) both welcomed the proposals, but they raised several points of detail, including the treatment of single-earner families compared to dual-earner families; the position in cases of separation or divorce; the complexity of administration; the numbers who have applied; and the transition to the integration of the full panoply of support that is offered to families. I shall deal with each point, briefly.

8.45 pm

First, the hon. Member for Kingston and Surbiton ended his speech by referring to the complexity of the current child care support structure. That structure includes child benefit, income support—which the hon. Gentleman omitted to mention—working families tax credit and the children's tax credit. The Government intend to move in 2003 to an integrated child credit, based on a household income paid to the carer. That move will enable the Government to tackle some of the matters that have been raised this evening.

I can tell the hon. Member for Kingston and Surbiton that that move will be a substantial change affecting a huge number of families. The Government took the view that the move should be taken step by step. At each stage, we will ensure that we can get resources quickly to those families who need it most. That is why the working families tax credit will separate in 2003: there will be an employment tax credit for adults, while the child support element will be made part of the integrated child credit. Those changes are part of a coherent strategy that will enable us to deal with the problem, identified by the hon. Member for Kingston and Surbiton, in connection with single-earner and dual-earner families.

The hon. Member for Arundel and South Downs should know—I hope that he does—that the treatment in the tax system of the difference between a single-earner family and a dual-earner family is the direct result of the introduction of independent taxation by the previous Government. I hasten to add that independent taxation is a good thing for millions of women. It means that each taxpayer has allowances and access to tax rates. As a result, a family with two earners clearly has access to both earners' allowances, and the tax rates.

The hon. Member for Arundel and South Downs said that that produces direct discrimination. In fact, it is merely a function of a tax system that respects and recognises individuals equally. We are working to resolve the matter, although the solution is not simple. Moving to the integrated child credit means that there will be a move to a household assessment which the present tax system does not allow us to make. The different treatment of dual-earner and single-earner families will thereby be dealt with, as the amount of tax payable will be assessed according to each household's income.

I reject the suggestion that we should have waited and not used resources currently available for the children's tax credit to help the families involved immediately over two years.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

I accept that the reason for the distortion is a function of our tax system, but I refer the Minister to the deliberations of the Select Committee on Social Security. Two or three years ago, the Committee focused on just that problem, and made some suggestions for dealing with it. The Government therefore did not have to go down the route that resulted in the functional problem that the Minister describes.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

If the hon. Gentleman looks at the latest report from the Social Security Committee on child support and the development of the integrated child credit, and if he reads its comments on the children's tax credit, he will find that the Committee now recognises that matters have moved on. It accepts that an attempt to bring together for the first time support for children into one place, to be paid directly to the main carer, is the correct way to advance. The Committee now acknowledges that the children's tax credit is an important element in providing immediate support to those families.

The hon. Member for Arundel and South Downs referred to the complexity of the system with regard to separation and divorce. The arrangements for the children's tax credit were agreed in the Finance Act 2000. I do not recollect the hon. Gentleman or any of his colleagues referring to the very unhappy circumstances in which a couple separate and there has to be a fair and decent apportionment of entitlement to a tax relief if there is joint care of the children. The children's tax credit approach to that is sensitive and fair. It has not been criticised before. Compared with the huge complexities of the married couples allowance and the additional personal allowance in terms of entitlement, the arrangements in the children's tax credit are as fair and straightforward as possible, given that they apply to complicated personal circumstances where a family is under considerable pressure and stress.

The hon. Gentleman said that the form was complicated. I am sure that he cannot have seen what is a straightforward form for claiming tax relief. He might be confusing it with some other form, but I do not want to speculate which one it might be. The application form for claiming the children's tax credit was researched and tested on a sample of about 1,000 people to see whether they understood it clearly or whether it would put them off making a claim. The most recent figures show that 3.5 million PAYE taxpayers—some 85 per cent.—have returned their forms. The other 1 million people are self-employed and pay their tax in arrears anyway. Under the self-assessment scheme, their relief will be available to them when they account for their income in the current tax year.

I agree that we need to find those people who are entitled to claim the children's tax credit but have not yet done so. The Chancellor wrote to every hon. Member asking them to encourage parents at every opportunity to apply for the relief. It will be paid from the beginning of this tax year, whenever they apply for it. I hope that all right hon. and hon. Members will continue to encourage parents to claim the children's tax credit, because up to £10 a week is no small amount for those families.

Photo of Edward Davey Edward Davey Shadow Minister (Olympics and London), Shadow Spokesperson (Treasury), Liberal Democrat Spokesperson (Treasury), Liberal Democrat Spokesperson (Olympics and London)

I know that the Paymaster General has not been speaking for long, but she has not answered my point about a two-earner couple—[interruption.] The Minister says that she will answer it, but I will just make the point for the record. In my example, both people earn just below the base rate limit. When the integrated child credit is introduced, will they be protected against losing the £520 provided for in the clause?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I had not forgotten the hon. Gentleman's point; I was trying to work through each subject area.

When the Government introduce the integrated child credit in 2003, the Chancellor will have to look closely at the distributional impact of the introduction of the children's tax credit with regard to whether it benefits families as well as its predecessors did. I am sure that the hon. Member for Kingston and Surbiton would not expect me to commit the Chancellor to future decisions, although he might wish that I would. However, the hon. Gentleman's point must be crystal clear to all those who understand the position—that is, why would we create a system to help families that did not do so?

Finally, specific points were made about entitlement to children's tax credit and its interaction with the working families tax credit and the 10p rate. The combination of those three things will ensure that the families in greatest need receive maximum benefit from the provision that the Government have made available. On that basis, I commend the clause to the Committee.

Question put and agreed to.

Clause 52 ordered to stand part of the Bill.