Children's Tax Credit: Baby Rate

Clause 53 – in the House of Commons at 8:30 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

I shall speak about clause 53 and touch on schedule 11, which relates to it. The objective of the clause is to provide, from 2002–03, a full year's child tax credit in respect of a child born in the current tax year. I am not clear whether the credit will be given pro rata, but my understanding is that it will not. Would a couple who have a child in September 2002 and who qualify for full child tax credit receive the full £520 or six months' worth? The wording is slightly obscure about whether they would receive a full year's worth or a pro rata amount.

Schedule 11 adds complex changes to the rules when a qualifying baby is resident with more than one adult during the year of assessment. Will the Minister explain, in understandable language, what that means? The fact that the schedule refers to a "qualifying baby"—a qualifying child born in the relevant year—implies that there must be babies who do not qualify.

Disqualification under section 257AA of the Taxes Act echoes the definition of a qualifying child, and where a husband and wife or the relevant two people split up, they may lose some relief, which cannot then be claimed back. The schedule is so complex and obscure that I have read it several times without understanding precisely how it is intended to operate. My main request, therefore, is for a practical explanation of what people will receive and what the angle is on qualification and disqualification.

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 shall focus on the policy point, and why the Government are going down the route taken in the clause. They want to provide extra money for families with children aged under one—babies—and that aim is laudable. The question is whether the clause is the best way to do it.

In the past, new parents could claim a maternity grant on registration of the birth of their first child, and that provided a lump sum up-front that they could use for the expenditure well known to arise when one has a baby—on prams, cots and all the other things that one needs. Incidentally, perhaps I should declare an interest—although I am not sure whether it is required by the Register—as an unmarried male who hopes to be married and have a child.

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As regards political policy, the question is whether a maternity grant or a tax credit is the most effective measure. With a tax credit, the money is not up-front. Presumably, one has to wait for the monthly pay cheque, so the benefit will be received over a period. Perhaps some families buy everything on hire purchase, but many want to pay up-front, so the benefit of the Government's laudable aim of putting money in the pockets of families with new-born babies could be more effectively delivered if they chose a different route. The old maternity grant achieved what I am advocating—money up-front for the purchases needed at the beginning of a child's life.

There is a strong argument that a tax credit may not be the best way of delivering the Government's policy objective. Of course, there are arguments on both sides. The Government might say that a universal maternity grant would be claimable by higher-rate taxpayers, while the tax credit is, in effect, means-tested. However, there are not many people in that category; the means-testing necessary to achieve the Government's aims would not involve a huge amount of money.

Moreover, it is possible that the Government's chosen method might reduce take-up. That is important. What about families who do not pay income tax for a short period? What about families who have not applied for the credit and are not aware of it? They will miss out. We have heard about the problems of take-up of the children's tax credit, which is a recurring credit. How much greater will the problems be for a credit that lasts for only one year? I am not convinced that the Government are taking the right route to ensure that families who need extra help at that time receive it. I hope that the Minister can persuade me, but I am not sure whether she can.

There may have been take-up problems with the former maternity grant, but my recollection of the days before the Tories abolished it is that there was a high take-up rate. It was one of the benefits for which take-up was almost universal. It was advertised in maternity clinics, GP practices and so on, and it was fairly easy for people to apply. Young mothers might be reluctant to get involved with tax credits; it all sounds terribly financial and difficult. They might be more reluctant to go for that form of help than for a straightforward maternity grant.

I hope that the Government will be able to explain their policy objective. I am not convinced that it is the right way to go.

Photo of Steve Webb Steve Webb Shadow Spokesperson (Work and Pensions)

I should like to explore further the points that my hon. Friend the Member for Kingston and Surbiton (Mr. Davey) was making about take-up. The Paymaster General said that children's tax credit forms had been returned by about 4 million families on PAYE—so 15 per cent. have not yet claimed it. As my hon. Friend says, we do not know whether that 15 per cent. will claim the new baby tax credit. Obviously, it is not too late for them to do so, but they have not yet been found. Given that the Government invented the children's tax credit two years ago, and have thus had two years to find people but have failed to find that 15 per cent., there is a question about whether the new tax credit will eventually reach them.

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

The hon. Gentleman is very knowledgeable on such subjects, so he will recall that the take-up of family credit, for example, which ran for a considerably longer period, did not reach the heights that the children's tax credit has already achieved in the year in which it has become operational. Yes, we must find the 15 per cent. or so—the 500,000 people who have yet to send in their forms—so I am not complacent, but by any measure, the Government should be congratulated on the very high take-up that we have already achieved for the children's tax credit, notwithstanding all the other issues that the hon. Gentleman raises.

Photo of Steve Webb Steve Webb Shadow Spokesperson (Work and Pensions)

Well, that is interesting, is it not? The Paymaster General said, "by any measure", and there is an alternative yardstick to the family credit or the working families tax credit take-up rates—the child benefit take-up rate, which, as she will know, is approximately 100 per cent. She may know someone who is not claiming it, but the rate is about 100 per cent.

The Government have decided that they want to support families who have a new baby, and they know where every single one lives, because when the child is registered for child benefit, the Department of Social Security sends back a response and issues a benefit book or notifies the family that the money can be paid into their bank account. They are precisely the people at whom the child tax credit is aimed, so instead of having a baby tax credit—the subject of the clause—why do not the Government simply put a £500 cheque in the post when those people claim child benefit on day one? As my hon. Friend the Member for Kingston and Surbiton (Mr. Davey) says, that would give them a lump sum up-front, with which they could buy cots, prams and so on. I speak as a father of young children, which is why I thought I would take part in the debate.

Another point, which has not been mentioned so far, is that when the money becomes part of the monthly income for the first year of the child's life, there is a danger that the family will adjust to that pattern of income. Parents will have £40 a month extra for a year, but when their children reach the age of one, they will come to our surgeries telling us that the Government have just taken £40 a month from them.

There was never any pretence that the payment would continue—it is just for the first year—but the families will have become used to a pattern of regular income that includes the £40 boost. They will not have been able to smooth out the payments to buy the lump-sum items, because they will have had to buy those items at the beginning. The danger is that families may get used to that standard of living, and then have the money taken away from them. However, there may be a hidden agenda in that idea—to get the mum back to work.

The clause is not really about supporting families in poverty when babies are born, because that policy is now known as the sure start maternity grant, or whatever. I believe that that is largely the same initiative, but it has to be renamed. There is a maternity grant system, so the baby tax credit is not really about poverty among families with new babies; it is about the Government's agenda of getting more people into the labour market. They seem to suggest that a year is enough. The financial support for families with young children drops after a year, so how will they make up for the loss of that £40 a month? Perhaps they will start pin-money jobs or work a day a week at Tesco, or whatever.

I should be interested to hear the Paymaster General expand a little more on the Government's thinking, because they have not taken the action that they were expected to take on paid leave and so on. I wonder whether that is why the tax credit will last only a year—but what does that say about the Government's views on whether people should return to work a year or so after their children are born?

The Government clearly have a mechanism to get the money to every one of those families if they wanted to, but the problem is that they would have to use the benefits system. The second fundamental criticism is that the Government's dogma says that this is a tax credit. It is not in the tax code, and it is assessed on the family, not on the individual, but it is called a tax credit, so it will probably not feature in the DSS accounts and expenditure.

A system that would have given money to everyone who was entitled, with 100 per cent. take-up, has been ditched—or rather, not adopted—in favour of a system that misses 15 per cent., and does not help families so effectively because of the Treasury dogma that it is better to provide things called tax credits rather than social security benefits. Sometimes the benefits system is the best way to help families. Sometimes take-up is better in the benefits system than with a tax credit, so I am disappointed that the Government have not gone down that avenue.

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

Contributions to this debate have fallen into two categories. The hon. Member for Arundel and South Downs (Mr. Flight) talked about the clause and how it relates to schedule 11, and the hon. Members for Kingston and Surbiton (Mr. Davey) and for Northavon (Mr. Webb) referred to the support policies that go alongside the children's tax credit, which is designed to support young families.

I shall deal first with the points made about schedule 11 and the clause, and describe what they will do. They will introduce the additional children's tax credit that will be payable from 2002 for the first year after a child's birth. It will not be paid pro rata but for the whole year. The clause also provides for an additional £5,200 of children's tax credit in 2002–03, and that will be paid at the rate of 10 per cent.

The clause establishes the principle of the baby credit within the children's tax credit. Subsection (1) will insert a new subsection (2A) into section 257AA of the Taxes Act 1988, and will provide for an additional £5,200 of children's tax credit in the year after a child's birth. Similar provisions were made last year to introduce the children's tax credit, and although the figure of £520 already appears in the Taxes Act, this clause inserts the principle of the credit of £5,200.

The clause also describes the basis on which the baby credit can be claimed and defines the qualifying child. A child must be born within the tax year to qualify for the relief. The clause also relates to schedule 11 and provides for the introduction of the baby credit in 2002–03.

Schedule 11 will place those principles in the Taxes Act 1988 to sit alongside the existing provisions for the children's tax credit which will be worth up to £520. Paragraph 2 introduces the higher rate and provides that it can be shared in the same way as the lower rate. Paragraph 4 provides for a re-election in year, which means that when a baby is born within the tax year, a family will be able to apply for the credit immediately and will not have to wait.

The schedule also makes it clear that however the credit is paid—it may be shared between two members of the family who live together or between two people who have separated but have equal responsibility for the child—the combination of their entitlement can never exceed 100 per cent. of the credit. However, if the family structure changes, their entitlement to the credit remains.

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If a family separates having claimed the baby credit and decides to share the remainder, the schedule provides for the two periods to be added together as a tax year. Otherwise, the baby would not be a qualifying baby. Paragraph 5 sets out how the arrangements will work. Only one credit is paid for a child. Irrespective of whether the parents live together or are separated, they are still entitled to only one credit, which they can divide between them. I hope that that is crystal clear to the hon. Member for Arundel and South Downs, but I shall give way—with some reluctance—if it is not.

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

I have a simple and obvious question. As I understand it, depending on the extent to which the new-born baby qualifies, the parents will get both the children's credit and the baby credit in the first year of that child's life. However, the provision could also be taken to mean that it is not possible to get children's credit if the baby is born within the tax year. In those circumstances, the parents would have to wait until the child was six months, nine months or whatever and the next tax year started. The wording could mean either that a double credit is provided in the first year, or that it is not.

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

It is based on the year in which the child is born. However, I shall consider my explanation of schedule 11 and if for any reason I was not precisely correct, I shall write to the hon. Gentleman. I believe that what I have said is right. The provisions for the baby credit operate in the same way as those that were used when we introduced the children's tax credit in last year's Finance Bill. Clause 53 and schedule 11 add the baby credit, which will operate on the same basis in terms of proportionment.

The hon. Members for Northavon and for Kingston and Surbiton inquired about the best way in which to assist families, especially when their children are very young and the burdens are greatest on the family budget. I know that one of them is very knowledgeable about such matters and the other is hoping to be so soon. They asked whether the children's tax credit and the baby credit were the best way to proceed.

The pressures on families in the first year of a child's life are acute when one parent is unable to work. Certainly the woman would not work during her confinement and maternity leave. The baby credit should be seen as part of the package of changes that the Government are progressively making to maternity pay and maternity leave, which we are extending. The sure start maternity grant has been increased to £500 from April 2000 and is paid up-front. The children's tax credit and the working families tax credit will follow the income support premium for children, so that they are included in the integrated child credit. That will be paid directly to the carer and will be a regular income.

I was puzzled by what the hon. Member for Northavon said about the Government's hidden agenda to force women out to work. I can speak from personal experience. When I was a single parent, I met many people in the same circumstances. Indeed, I continue to meet single parents and know that many women want to be economically active. The debate centres on managing the balance between work and life, and the need to enable women to do that.

There is nothing sinister about the Government's advancing that agenda and taking the opportunity to introduce the children's tax credit, which gives immediate help to families. We are publicising the children's tax credit in bounty packs. I am sure that the hon. Member for Northavon, who must be knowledgable about those packs, will explain later to the hon. Member for Kingston and Surbiton what they are and what their significance is, to mothers in particular.

The argument about dependency could apply to any payment. I agree with the hon. Member for Northavon that we must use the method of giving the support that works best, whether that comes through the social security system or through tax credits, which the Government believe are the best way to deal with questions of welfare to work and the work-life balance. Lowering marginal rates of tax provides incentives for family members to be in paid employment. The hon. Gentleman's point about families having to adjust to the loss of the baby credit could apply equally to child benefit. When a child becomes economically independent, the family lose child benefit, which is not an insubstantial amount, thanks to this Government, and if an unemployed person finds employment, the child premium will be lost.

I reassure the hon. Gentleman that there is not a sinister message behind the measure. I understand that he and his party do not see eye to eye with the Government about the use of tax credits, but I will continue to advocate them, and I am sure that he will continue to explain why he does not like them. There is no hidden agenda, and the Government have not concealed the fact that the children's tax credit will become part of the integrated child credit in 2003. Important decisions about the structure of that credit will be made. Those are not the subject of this debate, but hon. Members will want to be aware of them.

I have explained how clause 53 will operate and how schedule 11 supports it. I have made it clear how the Government's broad approach of using tax credits, maternity pay and grants to support families with young children is the best way forward. I commend the clause to the Committee.

Question put and agreed to.

Clause 53 ordered to stand part of the Bill.

Schedule 11 agreed to.

Bill (Clauses 1 to 3 and 16 to 53 and Schedules 4 to 11) reported, without amendment; to lie upon the Table.