'(1) A person is guilty of aggravated tax credit fraud if he is knowingly concerned in any fraudulent activity undertaken with a view to obtaining payments of a tax credit by him or any other person and—
(a) tax credits have been fraudulently obtained by himself or another in excess of the prescribed sum; or
(b) he has been convicted of an offence under the provisions of this Act or a benefit offence as defined by section 7 of the Social Security Fraud Act 2001 within the preceding five years.
(2) A person who commits an offence under subsection (1) is liable—
(a) on summary conviction, to imprisonment for a term not exceeding six months, or a fine not exceeding the statutory maximum, or both, or
(b) on conviction on indictment, to imprisonment for a term not exceeding fourteen years, or a fine, or both.
(3) Regulations may make provision as to the prescribed sum in subsection (1).'.—[Mr. Clappison.]
Brought up, and read the First time.
With this it will be convenient to discuss the following: Government amendment No. 23.
Amendment No. 3, in clause 33, page 21, line 40, at end insert—
'(3) The Secretary of State shall within one year of this section coming into effect and every year thereafter lay a report before Parliament on—
(a) the extent of fraud in claims for tax credits, and
(b) the measures he has taken to deal with fraudulent claims for tax credits, including measures to facilitate the early detection and prevention of such fraud.'.
Amendment (a) thereto, in line 3, after "credits", insert—
', including the estimated extent of fraud as a proportion of all error in such claims,'.
I shall briefly consider Government amendment No. 23 first, as it deals with a subject that is slightly different from the provisions on non-compliance. We welcome the amendment and we are grateful to the Paymaster General for writing to us about it. The change in the wording of clause 31 will be advantageous and fairer to employers, especially small employers. I ask the indulgence of the Financial Secretary to the Treasury and the House in permitting us modestly to claim some small credit for bringing that about by raising the issue in previous debates.
In Committee, we drew attention to what would have been a significant tightening-up of the provisions, which would have been a considerable imposition on employers. Following that scrutiny, it emerged that the situation that would have prevailed had the Bill been passed unamended would have been even worse than we originally thought. That point was disclosed in a letter from the Financial Secretary.
When we originally raised the issue, we were worried that the clause would extend liability for innocent errors made by employers—acts and omissions on their part—that were neither fraudulent nor negligent but that would have resulted in the imposition of penalties on employers. In the letter, it is revealed that it would have been even worse than that, because the liability would have gone further.
The Financial Secretary wrote that the clause
"would allow a penalty to be imposed on an employer even if the incorrect payment of tax credit was attributable to an innocent error on the part of the employer or for some other reason outside the employer's control."
That means, quite simply, that an employer could have faced a significant penalty—a particularly significant penalty for a small employer—for something that had nothing to do with him and that was the result of someone else's actions. That would have been a serious state of affairs. Government amendment No. 23 puts it right, and we welcome it.
However, we add this sentiment, which is apt in the circumstances. It is a pity that we could not have extended to the rest of the Bill the detailed scrutiny that we were giving to the parts that were considered in Committee, to discover what other pitfalls there may have been. The Government amendment has emerged as a result of that scrutiny. We can only express the hope that there are no more pitfalls awaiting small employers or anyone else.
I now come to the meat of this group of amendments and the new clause: fraud. We believe that fraud within the tax credit system is a serious issue, and that the starting point for that issue is a proper assessment of the extent of fraud in the existing tax credit system. Quite simply, we need to know how much fraud there is within tax credits.
We have been asking that question for some time and, sadly, we are no closer to receiving a straightforward answer from the Government today than we were when we began asking the question. We would like to know, for example, whether the Government themselves know how much fraud there is. If they do, will they tell the House?
I asked the Paymaster General that question in March 2001, during a debate on the uprating of tax credits. She kindly agreed to write to me and she was as good as her word. She wrote in April 2001 and told me:
"The Inland Revenue are carrying out a benchmarking exercise to establish the level of fraud in tax credit claims. This began in September 2000 and will run for twelve months. The results will be used to ensure tax credits compliance work is carried out in the most effective way."
Taking the Paymaster General at her word, on
"The Inland Revenue is currently undertaking an exercise to benchmark the level of fraud within the working families tax credit. The full results of this will be known early next year."—[Hansard, 19 December 2001; Vol. 377, c. 323-24W.]
Well, here we are, early next year as it was then, and in Committee we had the opportunity to ask—at an appropriate time, it would seem—about fraud. We asked the same question, but without any greater success in getting an answer. We have been mulling over what the Paymaster General said in Committee:
"On the benchmarking report, I told the hon. Member for Hertsmere that the Inland Revenue are considering the details and a report will come to me. It is already using that information to inform people about the new provisions. I cannot give him a guarantee that I will be able to publish that information because it deals with specifics of possible frauds that it would be unwise to put in the public domain. However, I will consider how to ensure that he is properly informed so that he can discharge his parliamentary duties."—[Official Report, Standing Committee A,
Since then I have asked a further parliamentary question. I know that the Government like to control everything these days, but I would like to be the judge of how I discharge my parliamentary duties and I am afraid that the answer I have received from the Government does not enable me or anyone else to discharge their parliamentary duties. I was told:
"The Inland Revenue are currently analysing the data from their compliance benchmarking exercise. We shall be considering the results, and questions of publication, within the next few months."—[Hansard, 5 February 2002; Vol. 379, c. 851W.]
I have been asking the same question for roughly a year. I have been taken through to the time when the Inland Revenue exercise concluded, at the end of September. We were no wiser at the end of that. We were no wiser as a result of asking the parliamentary question in December 2001. We were no wiser after the Committee, and we are no wiser after this most recent written answer. I do look to the Financial Secretary for an answer today.
Given the speed with which the Government are changing the tax credits system and the way in which new tax credits are constantly emerging, I am very worried that this tax credit will be abolished before we have the chance to know how much fraud there was in it. We shall move on to the next tax credit and we shall be told about that, that the Government are conducting a benchmarking exercise and it is too early to say what its results are. We need to know today from the Financial Secretary.
My hon. Friend has set out a sorry tale of delays and prevarication by the Government. Might he perhaps be tempted to explain to us why he thinks that the Government may have prevaricated in providing that information to the House to enable hon. Members to make a judgment as to the extent of fraud in that system?
A variety of explanations were put forward in Committee, but my hon. Friend assumes in his question that the Government themselves know, so it would be good to have a straightforward answer from the Financial Secretary whether he knows the outcome of the benchmarking exercise carried out by the Inland Revenue. Does he know how much fraud there is in the working families tax credit?
If the Financial Secretary does know, would he tell us whether he will kindly put that figure in the public domain? I am not asking him to clarify what was said in Committee by the Paymaster General. To summarise, she said that the Government were afraid of encouraging people to commit fraud by giving away too many details. Well, we are not asking how to commit fraud. We are not asking for details like that. We are simply asking how much fraud there is. If it is the Minister's argument that it would be dangerous to say how much fraud there is, that in itself would be a very strong temptation to people to commit fraud if they heard something like that coming from the Government. It is hardly a ringing endorsement of the invulnerability of tax credits to fraud.
The same argument has not applied to fraud in the benefits system. At the most recent Work and Pensions questions we were told by the Secretary of State himself, I believe, how important it was to know how much fraud there was in the benefits system. The same considerations apply to the Tax Credits Bill, so today we are looking to the Financial Secretary to give us some straightforward answers to straightforward questions.
Knowing how much fraud takes place is very important, but that is only a starting point; it is also important to find out what is being done about it. That brings me to amendment No. 3, in which we propose that we have a report every year on the extent of tax credit fraud, so that we know what is happening. We would have a starting point—we would know how much fraud there was to begin with. We would know what measures were being taken to deal with it and, as a result of that report, we would know each year what progress was being made in dealing with fraud.
The Government said in the 1998 Green Paper on fraud that that scenario would be desirable. They said it is important to have better information about the extent of fraud and then to discover what is being done about it. In Committee, the Paymaster General told us that early detection is important to stop abuses that may arise in the system. We agree with her, so that would be specifically required under amendment No. 3, which, we hope, will find favour with the Financial Secretary for that reason.
We believe that much more can be done. In Committee, we explained how we would like tax credit fraud to be tackled. We would like better co-ordination between Departments and between local and central Government, greater co-operation between the public and the private sectors and as much involvement from the public as possible in providing information. We welcome the fact that there has been a significant public response to the benefit fraud hotline.
I was told in a parliamentary answer last week that the public had communicated to the Inland Revenue, through the benefit fraud hotline, 16,676 allegations of improper applications for the working families tax credit and disabled person's tax credit. We welcome that public-spirited co-operation from people who share our concern that fraud should be dealt with effectively. I do not know how the public would respond to what the Government have done in relation to that public willingness and spirit of co-operation.
I shall give way, but my hon. Friend may want to ponder on the statistics showing what the Government have done. We have heard what the public have done—they have made more than 16,000 allegations. However, I was told, by way of a written parliamentary answer, that there were 530 recoveries—presumably, recoveries of incorrect payments—18 penalties, which are financial penalties, and 2 prosecutions, even though 16,676 allegations were made to the hotline.
In developing that theme, I wonder whether part of the problem is that those who run the fraud hotline do not feel that they are given enough support. I suggest that because I have a letter from my constituent, Julie Embling of the Acorn kindergarten in Exmouth, Devon—I wrote to the Under–Secretary of State for Education and Skills, Mr. Lewis, in November asking for a reply, but I have yet to receive one—who maintains that, in running her small private school, she is owed about £2,000 a year by people claiming the working families tax credit who do not pay it on to her. She spoke to someone at the fraud hotline about her recurring problems and was told that child minders, nurseries and pre-schools are suffering financially from that nationwide problem. Those at the hotline suggested that she write to me as her Member of Parliament to try to persuade the Government to change the laws on the working families tax credit.
I am grateful to my hon. Friend for making that point. I am sure that his constituent will be as interested as we are in the consequences of these proposals. She will also have in mind the recent experience of fraud involving individual learning accounts. Innocent providers lost out under that system, as did the people who were innocently trying to obtain education and training, because of the disruption caused when it was suddenly discovered that large-scale fraud was taking place and the Government had to bring the system to an ignominious halt. We are trying to prevent something similar happening again by having a thorough and proper debate on fraud.
We are not impressed by the number of prosecutions for working families tax credit fraud. We do not suggest that that is the only way to tackle fraud, but we would like people who knowingly commit fraud, especially those who commit the most determined fraud—I shall deal with that in speaking to new clause 6—to be prosecuted for a serious criminal offence. We suspect that many people who could be prosecuted are not being prosecuted.
Altogether, in the two years that the working families tax credit has operated, there have been only 28 prosecutions. There has been a recent spurt in the number of prosecutions—it may be entirely coincidental that questions have been asked about that—but the figure is still low in relation to the size of the system, the number of people claiming and the amount of fraud in other parts of the benefits system. I emphasise that we, like members of the public, are interested in prosecuting people who commit serious fraud and in dealing with them severely.
New clause 6 is designed to create an offence of aggravated tax credit fraud for those who repeatedly commit fraud or obtain large sums. Those determined fraudsters need to be dealt with more seriously. We need to decide how best to protect the interests of taxpayers and the majority of tax credit claimants who are honest and who also believe that the fraud is unacceptable. They want us to get to the people who commit serious frauds to obtain a large amount of money or who defraud the state again and again.
Treating such offences more seriously would be in line with what the Government are trying to do in other parts of the benefits system. The Social Security Fraud Act 2001 tackles fraud in other benefits. It received Opposition support and removes benefits from people who are repeatedly convicted of offences. There is a widespread desire to ensure that those who commit the most serious frauds are dealt with more strictly.
We have asked many questions about fraud and want straightforward answers. It is time that the Government came clean. They should tell us what the level of fraud is and set out more clearly what they intend to do about it. We will continue to press for answers.
I congratulate Mr. Clappison on his assiduous studying of the Bill in Committee which led to the correction set out in Government amendment No. 23. I wholeheartedly associate myself with his comment that large chunks of it were not scrutinised because of the tight timetable. It would be regrettable if other aspects of the Bill were not picked up on. I hope that the Government take a lesson from that the next time they programme our discussions. They should realise that it is in their interests to have proper scrutiny. Indeed, we would all benefit in such circumstances.
This is a win-win situation. It is in all our interests that there is proper scrutiny. However, the Government's reputation for producing good legislation is damaged if Bills are not properly scrutinised and have to be corrected later on. So I welcome Government amendment No. 23 and the process by which it came about.
I also welcome the suggestion in amendment No. 3 and amendment (a) that there should be annual reports on the extent of fraud, what is being done about it and how it contributes to the total error in claims. My slight hesitation is that a detailed exposition of what is being done to tackle fraud might show our hand too much, but the request for information on the scale of fraud and the overall progress in tackling it would be welcome.
I will be interested to hear the Financial Secretary's response to new clause 6. We all agree that fraud is a bad thing and that repeated or large-scale fraud is even worse. There is only one question, therefore: what is the appropriate penalty? When my colleagues and I ask whether a proposed penalty, of whatever magnitude, is not serious enough or too serious, it is sometimes suggested that we either approve of the crime or are not tough enough. We want such crime punished properly, but does new clause 6 set out the right punishment? The hon. Member for Hertsmere did not try to justify the specific tariff or degree of severity that it sets out, which is why I have an open mind about whether to support it.
My instinct is to be slightly nervous of the severity of the proposal. I do not understand the legal system enough to understand the precise implications of new clause 6(2)(b) and its reference to conviction on indictment. However,
"imprisonment for a term not exceeding fourteen years" strikes me as an extraordinarily long period.
We have a scale of relative importance of different offences. To draw an analogy with recent news items, it was suggested that those who take mobile phones off people in the street should face four years, or something like that, in the slammer; at that point, someone came on the radio and said, "But something much more serious was done to me, and the person who did it only got 18 months." No one disagrees that the act is wrong; the question is where it fits into the scale of seriousness of offences and penalties.
I am listening with great interest to the important points that the hon. Gentleman is making. The purpose of setting a maximum sentence is to cater for the worst type of offences. The new clause is in effect saying that offences with such aggravating features are the more serious type of offences.
It might interest the hon. Gentleman to know the current state of affairs regarding those who have already been prosecuted for working families tax credit fraud—an offence that currently attracts possible imprisonment. Only seven people have been sent to prison for such offences, and a written answer that I received suggests that some of those people may also have been involved in offences of another type.
I am grateful for that intervention, and I understand that we see only the maximum in the new clause. However, I cannot help reflecting on a dreadful constituency case in which a teenager was murdered and the murderer was given 12 years. I find it hard to understand the relative figures when it is suggested that a fraudster—even a serious tax credit fraudster—should be given 14 years. That is not to say that the offences are not serious, or that the sentences are not serious enough. I just wonder about their relative position in the scale of penalties for offences.
I look forward to hearing the Minister's comments. We all agree that tax credit fraud should be cracked down on, but, in passing, I observe that the proposals about not putting the money through the pay packet would have worked well in the context of the current group of amendments. The ability to pass money through the books of a firm is an open invitation to fraud if the firm wants to collude with its employees. Direct payments to the individual are far less prone to organised fraud of that sort.
I welcome the fact that the Conservative amendments turn the focus to fraud. Regular reports to Parliament would be welcome, but I have some reservations about the extent of the penalties proposed in new clause 6.
I support new clause 6. It is necessary because the regime to be introduced by the Bill will make fraud easier than it is under the system to be replaced.
That Committee suggested, and I agree, that a straightforward benefits system was less susceptible to fraud than a tax credit system. I venture to suggest that one of the reasons why the questions asked by my hon. Friend Mr. Clappison about the level of fraud under working families tax credit have not been answered is that those answers would reveal a higher incidence of fraud under the tax credit system than under the family credit system that it replaced.
Why should that be embarrassing to the Government? The answer is not far to seek: the working families tax credit system and the tax credit system to follow from the Bill was an idea of the Chancellor of the Exchequer and Her Majesty's Treasury. The system is manifestly not only more complicated, but more susceptible to fraud.
The questions that I have posed about increased susceptibility to fraud have been borne out by international experience across the Atlantic. The Canadian working income supplement, a tax credit system not unlike the one that the Bill seeks to introduce, has been a disaster. It has resulted in increased fraud and has led the Canadian authorities to the inescapable conclusion that they should scrap it and return to a benefit-based system. Equally, in the United States, the Internal Revenue Service is beside itself at the amount of fraud perpetrated under the earned income tax credit system, which is the key model for the Treasury's working tax credit and, before that, the working families tax credit. The figures speak for themselves. In early 1997, the taxpayers of America lost more than $4.4 billion as a result of fraud in the earned income tax credit system, mainly because of poor certification—in fact, it is virtually non-existent—of hours worked in employment. The Economist observed:
"There is no longer a consensus that the earned income tax credit is a sensible addition to America's anti-poverty programmes."
New clause 6 has a clear intention; it will introduce serious penalties for aggravated fraud. The system that the Bill will introduce provides more scope for the fraudster, chiefly because of the annual basis of assessment, which contrasts with the much shorter periods required for income support and the six-month assessment period for working families tax credit. If a claim is made before the beginning of a tax year for the following tax year, the claimant may have to calculate in his annual assessment what he thinks his income will be for the next 12 months. If there is a change in his circumstances, that will not be assessed automatically before the 12-month period is up.
The Institute for Fiscal Studies said that that is self-evidently loopy, as there is no comparable system in any other benefit regime; it does not think that such a period of assessment has previously been introduced without serious reassessment of the claimant's benefit within 12 months. From the Bill, it is clear that the Government seek to get round that by arguing that if there is a change in someone's circumstances, their case could be reopened. If someone gets a lot more money during the year, there will be a reassessment of the amount of benefit that they receive. However, within certain thresholds, the Government will choose to ignore any change in circumstances. We are told that there will be a threshold above which certain amounts of increased income will be ignored by the authorities, thus leading demonstrably to overpayment. That is what the disregard in the threshold means; someone will get more benefit under the new system than they otherwise would.
The Institute for Fiscal Studies thinks that that is a bit peculiar, but it becomes even more peculiar when we realise that we have not been told what the threshold is. Extraordinarily, all that we are told is that thresholds will be set by regulation; we do not know how much increased income will be disregarded or, in other words, constitute a benefit overpayment. In those circumstances, there is considerable potential for fraud. It may be argued that there will be powers to seek repayment of overpaid benefit at the end of the tax year, but that overpayment has to be detected. I know that my hon. Friends did sturdy work in Committee, questioning the ability of the authorities to get repayments made when overpayments have occurred in year.
At the beginning of a tax year, when information is given to the Inland Revenue about future income for the next 12 months, there is an in-built incentive to underestimate the amount forecast by the taxpayer. An answer to that conundrum has not been forthcoming from the Government and still causes great concern to the Institute for Fiscal Studies.
What about the ability of the Inland Revenue—not the Department for Work and Pensions any more—to police the new regime that the Bill seeks to introduce? I reiterate the powerful points made by my hon. Friend the Member for Hertsmere, because I fear that Ministers on the Treasury Bench may try to wriggle out of the question. In the letter that the Paymaster General placed in the Library, she stated:
"The Inland Revenue are carrying out a benchmarking exercise to establish the level of fraud in tax credit claims. This began in September 2000 and will run for 12 months. The results will be used to ensure tax credits compliance work is carried out in the most effective way."
What is the number of cases that have given rise to criminal proceedings as a result of that study?
That is a perfectly simple question. I hope that we will get an answer. During the speech of my hon. Friend the Member for Hertsmere, the Parliamentary Private Secretary scuttled no less than twice to the Box to get bits of paper. Much agitation was evident. I sincerely hope that the Financial Secretary has done his homework and that he will provide an answer to a question that was raised in Standing Committee—an answer that has been asked for twice, including my questioning now, in the Chamber today. It should not be terribly difficult, and it should be something that we have a right to know.
The Financial Secretary may smirk away. Someone once said of his general performance:
"We have seen the future; and it smirks", which, I think, is a variation on a quote from the Webbs. The right hon. Gentleman should not smirk. He may congratulate me on what he considers to be an amusing joke. I find it not so much amusing as worrying that he can laugh about a taxpayer issue. Mr. Field said that it is the taxpayer who is losing out as a result of fraud, and I suggest to the Financial Secretary that the taxpayer deserves some answers today.
The Government have the technology to calculate the number of cases that have been caught and the number of criminal proceedings that have been brought. We know that the Government can have access to that information because in her letter on
I try not to think too ill of my fellow man, in the inclusive Conservative party that my right hon. Friend Mr. Portillo has done so much to influence over the past few weeks. I do not want to resort to cheap rhetoric about benefit frauds, cheats and scroungers. We are seeking as a party to condemn a little less and understand a little more. So I want to be very gentle in making my point: I think that it is highly unlikely that the number of serious fraud cases that relate to working families tax credit and in which penalties are justified amounts to only 300 in one year. That is the number given in the Paymaster General's figures, but it seems remarkably low, so I repeat that we need the figures that she undertook to give to us.
In conclusion, I should like to make a more general point about fraud, not least in relation to that which is endemic as a result of having a tax credit system, as opposed to a straightforward benefit system and family credit. Apart from housing benefit, the two most vulnerable benefits in terms of fraud are jobseeker's allowance and income support, which are both folded into the working tax credit and child tax credit that are at the core of the Bill. On
"Previous estimates have shown that £2 billion a year has definitely been lost through fraud. A further £3 billion may have been lost in cases where fraud is strongly suspected".
On top of that lot, he referred to
"a further £2 billion where there is some suspicion of fraud."—[Hansard, 20 December 1999; Vol. 341, c. 323W.]
Those figures have been estimated to be somewhat on the low side, not least by my right hon. Friend David Davis when he was Chairman of the Public Accounts Committee. That estimable Committee suggested that, in total, social security fraud cost the average family about £500 a year. That is the scale and magnitude of the problem with which the Government have to grapple. Of course, the predecessor Administration also had to grapple with it. However, this Bill seems to encourage a lax culture in terms of application for the two credits. There is the disregard of increases in income, about which the authorities are saying "Don't worry about that, we'll overpay you." A new regime is being introduced in which the arrangements are more complicated and it will be more difficult for people to get the right answers. It will, therefore, give fraudsters more scope to try things on and claim that they were confused—a point that has been rather sagely made by the Institute for Fiscal Studies. For those reasons, as well as that which has already been mentioned—the secrecy with which Ministers are treating the information about the level of fraud in working families tax credit and tax credits in general—I urge the House to support the new clause and the associated amendments tabled by my hon. Friends.
I rise to speak to the amendments in the group to which I have appended my name. I do so for one very simple reason: when the Opposition were in government, they were, at least in my view, open to the charge of being soft on fraud and soft on the causes of fraud. I hope that those on the Front Bench will accept the amendments, as I would not want us to go into an election with that charge not only being pinned to us, but being widely believed by the electorate.
I want to support my right hon. Friend the Financial Secretary and again emphasise to the House the difficulties that he has in trying to ensure that the civil service machine is as effective as we want it to be in countering fraud. It is not part of my normal behaviour to attack civil servants either generally or individually, but I can say that the main culprits are not in the Box tonight and that I am thinking about the generalities and not about individuals.
Two examples might suggest that the machinery supporting the Government is not as anxious to counter fraud, or to take notice of the will of the House, as it should be. I have already cited the first example. I had responsibility for fraud for about 13 weeks, and decided that we should undertake an inquiry into the patterns of fraud in family credit. That information would be made known to the Treasury so that when it came to plan the working families tax credit, it could at least design out of the new benefit the easy means to fraud that were present in the family credit system. As is known, a successor Minister has told the House that the papers carrying my decision have gone missing. That hardly suggests that there is mega-support in some Departments for countering fraud.
The second example has also been cited. Attempts to get information about the extent of fraud through a parliamentary question tabled in my name took six months to elicit a reply. Again, that hardly suggests a group of people actively engaged in trying to protect taxpayers' money. I emphasise that point because we are not talking about our money. We are talking about a large number of people, many of whom earn low wages, who pay their taxes because they believe that they should. We have an equal duty to ensure that the money raised from those people, whether rich or poor, is spent in the way in which the House requires.
If we are casual with that responsibility, in the long run there will be even less support in the House for welfare measures than there is at the moment. So, if we cannot do this for the proper reason, we should do it for another reason—namely, because those of us who are interested in ensuring that those at the bottom of the pile get a slightly better deal than they would if there were no Government intervention want those programmes to be protected.
Just before the right hon. Gentleman moves on from that point, it is worth bearing in mind the answer that he received to his parliamentary question. It stated that
It took the machinery that he has described six months to tell him that it did not know the answer.
I hate to say this, but the Treasury looks good in this regard compared with the Department for Work and Pensions. I recently received a reply to a letter that I had sent to that Department nine months earlier. It had a "roller-towel" answer similar to the one to which the hon. Gentleman has just referred. All this suggests that, despite the Government's wish to counter fraud, that wish is not being backed up with resolute action by all civil servants. For the reasons that I have briefly outlined, therefore, I hope that when my right hon. Friend the Financial Secretary to the Treasury comes to reply, he will not surprise the House or taxpayers, and that he will express the Government's intention to adopt the amendments.
I thank the right hon. Gentleman—perhaps I should call him my right hon. kinsman. He has made a thoughtful contribution detailing some of the intrinsic problems that the Department faced when he was a Minister. Does he not feel, however, that an openness to fraud will inevitably be endemic in the system of tax credits? That system has been born out of a desire to push the burden of costs on to business, rather than keeping it with the Government.
I believe that there would still be fraud if we were operating the tax credit system in the Garden of Eden, given how easy it is to commit fraud. Hence the amendments, which are trying to send a police force into the Garden of Eden to do a bit of handiwork on the taxpayer's behalf. That is yet another reason to accept them.
I shall end on the note on which I began. In the run-up to the 1997 election, the party to which I belong was able to seize the initiative in countering fraud. Taxpayers thought that the Conservative party had totally failed to live up to its responsibilities to protect taxpayers' money. My worry is that if we are not seen to act ever diligently in protecting taxpayer's money, the charge made against the last Conservative Government—that they were soft on fraud and soft on the causes of fraud—will be made against us.
I hope that the Financial Secretary will deliver a robust response. Despite his difficulties in bringing some civil servants to heel in implementing the wishes of the House, I hope that we take an important step forward in protecting taxpayer's money and in tilting the balance towards decent citizens and against those citizens who rip us off.
The Government's approach contains a genuine flaw. They have understandably chosen a system that prioritises giving people credits as they need them. That system is extremely complex. Indeed, the Financial Secretary said in Committee that it would be like a television set—people would not understand how it worked, but they would turn the knob on and off. We should consider those two points together.
The word "fraud" may be wrong, but human nature is human nature, and, inevitably, those who qualify for tax credits will develop and understand ways in which to play the system. People will work out what cannot be checked effectively or will not be checked at all. Currently, there is a marked lack of discipline in the system, and I can understand why the Government are not keen on the kind of disciplinary measures that might tighten it up. For instance, all claimants might be required to produce a detailed annual return for the Revenue, answering all the key questions about their circumstances. That would circumvent the easy argument, "I didn't really know that I had to give that bit of information, and I didn't understand." The reply to that is, "How could you? It is a very complex matter."
Alternatively, the Revenue might have to check working hours with employers. That would not solve the problem in relation to the self-employed, but, again, checking with employers, whatever formula the Government apply in relation to average working hours, would be an enormous task and yet another burden on employers. The nature of the arrangement will encourage laxity, wheezes and playing the system—not major fraud, but a culture of fraud. We have seen such things in other areas of national life. When the Government are using the taxes and money of those who are not well-off and of others, they cannot afford to have their cake and eat it. If they are to introduce a negative income tax credits system, they must also apply the disciplines that go with it.
As other hon. Members have argued, two outcomes resulted from a similar system in the United States, on which much of the Government's approach is modelled. First, costs spiralled from, I think, $1.6 billion to more than $18 billion in a decade. Secondly, some 25 per cent. of the claims turned out to be invalid. As the Bill stands, we shall go down that road. Are the Government prepared to introduce the disciplines needed to prevent the same thing from happening here?
I do not wish to add a great deal more, but I want to put on record part of the debate in Committee on the message that the Government are sending out on working families tax credit fraud. I also want to explain the importance of the new clause and the amendments grouped with it, which were tabled by my hon. Friend Mr. Clappison.
In a parliamentary answer covering the period from October 1999 to September 2001, it was identified that there were 52,000 investigations into working families tax credit claims, of which 8,800 resulted in recovery of an overpayment. There were 478 penalties for over-claiming, but only 22 prosecutions, of which 13 were successful. My concern is that, with so few prosecutions following so many recoveries and penalties, the message to the perpetrators was that, to echo Mr. Field, the Government were soft on fraud and soft on the causes of fraud. That can only encourage fraudsters to commit further fraud, which is why I support the new offence of aggravated tax relief fraud. It is important to demonstrate that there is a stiff sanction.
It is also important, as in amendment No. 3 and amendment (a), to stress that the Government should be held to account by Parliament for the extent of fraud in the system and made to say, without giving the game away to the fraudsters, what measures they are taking to ensure that fraud is reduced. We must send out a clear message to the fraudsters, and I am afraid that the Government's track record, with so few prosecutions following so many false claims, sends out quite the wrong message.
This worthwhile and thoughtful debate has demonstrated the seriousness with which the whole House takes the issue of fraud. I assure Mr. Flight that the Government are determined to tackle it wherever and in whatever aspect of the tax and/or benefit system it appears.
I entirely reject the accusation—it was not only implicit but explicit in some contributions today—that we are not committed to tackling non-compliance in the tax credit system: we are, and I would argue that the measures in the Bill demonstrate that. The notion that the people who are responsible for administering the tax and tax credits system would glean from what some hon. Members have said today is that the House questions their seriousness of intent, which would be disappointing for a body of men and women engaged in a difficult and problematic field of enforcement.
My right hon. Friend Mr. Field clearly appreciates the balance that must be struck, whereby we need to be committed not only to deterring, detecting and reversing non-compliance but to encouraging people to take up what is rightfully theirs.
My right hon. Friend has championed that cause for many years, which distinguishes his criticisms and concerns from those of Mr. Ruffley, who, in an interesting reference to Mr. Portillo, demonstrated that the distance between Kensington and Chelsea and Bury St. Edmunds is more than geographical.
No, I have not finished.
The attempts by the right hon. Member for Kensington and Chelsea and his hon. Friend Mr. Bercow to change the face of the Conservative party are likely to take a long time. I heard the points that the hon. Member for Bury St. Edmunds made, and I will deal with them later.
If what the hon. Gentleman said earlier was supposed to be supportive, I hope that I never have to rely on his support.
A delicate balance has to be struck. If the hon. Gentleman is being supportive, I hope that he will have the grace to recognise that we need to get the balance right. There is a balance between helping the compliant majority to claim and to understand both what they are entitled to and their obligations under the system—because with rights come responsibilities—and having effective remedies against those who try to abuse the system.
There undoubtedly are people who abuse the system—we all come across them from time to time in our constituency surgeries. My right hon. Friend the Member for Birkenhead and I share a common approach to theology, and we both accept that man is fallen—so, as he suggested, we will not have the opportunity to observe what would happen if the measure were enforced in the Garden of Eden. We operate in an entirely different place, and our laws must reflect the nature of that place.
I am not sure that I accept that. There are a lot of fallen folk about, and I do not think that they are to be found in any one place or category. Even among ourselves I fear that there are some—on both sides of the House. We have to live with that fact, but our laws also have to reflect not only the reality of human nature but our need to get the balance right.
We had the opportunity to examine this issue at length in Committee, and I am rather surprised by some of the suggestions that have been made about the Bill. For example, I should have thought that Mr. Clappison would welcome the fact that we recognise the merits of his amendment and the points that he made so ably in Committee. However, he seemed a little churlish—
I fear so, although it was uncharacteristic. It was churlish of the hon. Gentleman to chide us for tabling our amendment. We recognised the force of his case, and I find it rather surprising that he suggests that simply because we tabled our own amendment, there may be other hidden horrors lurking in the Bill, as yet unrecognised because there has not been enough time for consideration. I would say that we gave the Bill very thorough consideration in Committee, just as we have done tonight.
Be that as it may, I would argue that aspects of the new tax credits make the system intrinsically more secure. The measure of income used is the income for a tax year, which is defined much more closely in line with tax, reducing the capacity for understating income and making it easier to cross-check income figures with tax and national insurance records. As right hon. and hon. Members know, understatement of income is a common feature of the system at the moment. It will be much harder to get away with that once the Bill completes its passage through this House and the other place.
I assure all who have contributed to the debate that our intention is that the administration of the system and the ethos that we create will develop a culture not only of maximum take-up of the system and the credit—the importance of that was put forcefully in Committee by the Liberal Democrats and my hon. Friends—but, importantly, of compliance and of intolerance of abuse. There must be a determined effort to bring to book those responsible for abuse. The regulations, and the guidance given to those seeking the credit and to those administering it, will buttress that culture.
Secondly, concern has been expressed about the child care tax credit. The ability of the new tax credits to respond to changes as they happen will mean that support for child care costs through the child care element of the working tax credit will be matched much more closely to the actual costs incurred. At the moment, support for child care depends on the situation when the claim is made; once awarded, child care tax credit stays in place for the full six months, but we are awarding that structural point. Entitlement to the child care element will stop if the use of qualifying child care stops. Of course, the corollary is that parents who are already claiming working tax credit, and who become eligible for help with child care costs, will be able to apply for it at that point.
The important point, which addresses directly the comments of Mr. Swire, is that we intend that there should be a system of rigorous spot-checks. Officials will visit nurseries to ensure compliance, so the system will not be lax or in any way tolerant of abuse. There will be checks, and we will try to improve links between the different Inland Revenue systems, which will make it harder for claimants to hide sources of income and to receive tax credits to which they are not entitled.
To combat fraud, up-front checks will be made, and the automated systems and data sources available to the Inland Revenue will be used to support systematic risk-screening techniques. My right hon. Friend the Member for Birkenhead made a very fair point—we have not always done as well as we should.
I regret any failures to answer letters and queries promptly. Right hon. and hon. Members may not like the responses that they receive, but as Members of Parliament they are entitled to speedy responses and every effort is being made to improve performance in that area.
Those checks will enable those cases that carry the greatest risk to be identified before payments are made. The Inland Revenue will then be able to carry out further checks and ask for additional information or supporting evidence from the claimant before deciding whether to put an award into payment.
The Revenue will carry out up-front checks on all claims. The initial automated risk assessment will identify claims that present a high risk of non-compliance or fraud and need immediate investigation. Those will be directed for consideration to staff in one of the Revenue's research, intelligence and analysis teams. The risk weightings used in the up-front screening process will be capable of being varied, either centrally or locally, in response to different factors such as changing perceptions of risk. I think that my right hon. Friend will accept that that is a very different attitude and approach from the one that has sometimes existed elsewhere. The research, intelligence and analysis teams will also have access to third-party information and data from other sources, such as the self-assessment system, to assist them in identifying cases.
During the year, the Revenue will carry out compliance work on cases where it suspects that an award is incorrect. Clause 16 enables the Revenue to require information and evidence to help it decide whether there are grounds for amending or revoking an award, allowing it to take effective action during the year to prevent tax credits being paid incorrectly.
Clause 18 allows the board to conduct inquiries into awards after the end of the year, enabling it to implement an end-of-year compliance regime—investigating awards, ensuring that they were correct and either amending or revoking them if they were not. The clause gives the Revenue the power to require information and evidence from any person to whom an award has been made, provided an inquiry has been opened. The Revenue may also obtain information from third parties.
In response to the hon. Member for Hertsmere, I should point out that there were more than 16,000 allegations to the hotline, but, as he will know, there were more than 50,000 investigations into working families tax credit applications. Up to November 2001, there were 50,382 investigations into WFTC applications and 1,668 into disabled person's tax credit applications. I suggest that that is not indicative of any slackness. The hon. Gentleman will want to know that we will be guided and informed by the outcome of the study to which he referred as we implement this tax credit system, and I can assure him that we will be.
On the most serious cases of suspected tax credit fraud, the provisions giving the Revenue powers to investigate fraud cases effectively are in clause 34. Clause 33, which amendment No. 3 would amend, creates a new offence of tax credit fraud. Such cases will be those where the actions of claimants are particularly offensive—the use of false documents, repeat offences, collusive employers or organised fraud by criminal gangs. Those cases will be considered for prosecution, but where they do not proceed for one reason or another, they will go back to the compliance teams at local level to be investigated and penalised. There is no question of people just getting away with it. It is not a case of, if they are not prosecuted, there is no follow-up. There will be follow-up. A clear message will be sent that fraud is simply not acceptable. That approach mirrors that for tax fraud, where similar considerations apply in deciding which cases should be subject to prosecution.
We on the Labour Benches cannot accept the notion that people who are being investigated for tax fraud, many of whom will be white collar workers or self-employed, should be treated differently from those who are being investigated for tax credit fraud, that tax credits are outside the overall tax system and that one particular group of people in society should be treated more harshly and more aggressively when it comes to prosecution than another. All people must be treated fairly. All people must understand that they have rights and responsibilities.
New clause 6 seeks to introduce the offence of aggravated fraud where the sum of tax credit at stake is particularly high or where a person has been convicted of social security or tax credit fraud in the recent past, opening the way to a higher maximum sentence on indictment.
Courts already have the power to take previous offences and the size of any fraud into account when setting sentence. We know that it is unusual for any court to pass a sentence for tax or tax credit fraud in excess of seven years, however aggravating the circumstances. Dealing with the mischief is not made more effective simply by ratcheting up the maximum sentence. That is an odd way in which to approach sentencing.
There is, however, the common law offence of cheating the public revenue: that can and will be used in appropriate circumstances. It allows the court to pass whatever period of imprisonment it feels is appropriate—there is no maximum sentence. I hope that, having considered that, hon. Members will not feel the need to proceed down the road that new clause 6 suggests. There are sufficient avenues available, and they will be used where appropriate. New clause 6 simply is not necessary.
Amendment No. 3 takes us into different territory. It seeks to impose a requirement on the Secretary of State for an annual report to Parliament on the extent of tax credit fraud and the counter-measures taken. I am not sure what it would add. The Inland Revenue already produces an annual report every year, which is presented to Parliament by Treasury Ministers. It covers, among other things, the Revenue's work on countering fraud and non-compliance across the range of its responsibilities. Since the Revenue took over responsibility for tax credits, the report has included its work on countering tax credits fraud and non-compliance. We are seeking to take a co-ordinated approach to tackling non-compliance in tax and tax credits.
The Revenue is subject to scrutiny by the National Audit Office and its board appears before the Public Accounts Committee. Treasury Ministers are, and will remain, answerable to Parliament on tax credit matters in the normal way.
I assure right hon. and hon. Members that their points about the importance of a vigorous and determined culture in relation to tax credit fraud will be taken on board. We will seek not only in debates in the House but in any other appropriate way to ensure that the House is kept informed of developments in that area.
I shall say a few words about the benchmarking study that was conducted on WFTC cases, which I know is of concern to right hon. and hon. Members. That work was undertaken as a means of evaluating the effectiveness of Revenue systems and, in particular, to inform the development of the risk assessment process. My hon. Friend the Paymaster General has made it clear that we do not think that it would be helpful to provide details of the factors that the Revenue would consider when deciding whether to take up a case. My hon. Friend has said that she needs time to consider the results of the Revenue's analysis and will consider whether it is appropriate to make any of that information available. She has heard the points that right hon. and hon. Members have made forcefully and effectively, and no doubt in due course will communicate her intentions in that regard.
This has been an important debate. We need to make sure that we send a clear message that fraud is unacceptable, that rights bring with them responsibilities and that we intend to ensure that we create a culture of compliance and determined enforcement of the tax credit system, while never forgetting that the system is designed to ensure that those who need help receive help when they need it. It is designed to ensure that we address the evils of poverty, particularly child poverty, and make work pay. In doing that, we need to be aware of the importance of combating fraud.
I hope that I have demonstrated to the House our seriousness of purpose and intent and that hon. Members will not push the amendments to a vote.
This has been an interesting debate and it has ranged widely into theological questions. I always approach issues of theology and morality with a certain degree of humility and reluctance. I never like to say too much on the subject; I do not want to speculate about who is fallen and who is not fallen. In this context, I am interested only in finding out what the wages of sin are, but the Minister will not tell me. I have asked him over and over again and he simply will not say. We heard more elegant prevarication, if I may put it that way, in his speech.
I should hate to be thought of as churlish in my response to Government amendment No. 23. I hope that I commended the Minister's response in Committee. I also commend his openness in revealing through his correspondence that the situation was even worse than we thought it was, and that the good that we have done through the amendment will be all the greater. Our sadness is that we have helped the Government in this, but we have not been given the chance to help them a little more by looking at nearly half the Bill, which did not receive any scrutiny.
Mr. Webb asked, interestingly, what the sentence should be and whether the maximum sentence was too harsh. I recommend that he look at the sentence of seven years' imprisonment, which is set for every fraud in the Bill. We are setting a maximum to deal with the worst cases of fraud—those that involve repeated offences of fraud and frauds of large sums. We would have to be realistic in considering what that large sum would be. It would be the amount that ordinary people thought indicated that somebody was profiting far too much. Some people are profiting far too much. On any view of it, the amount of fraud in the system is not reflected in the number of prosecutions. The Financial Secretary told us of the 50,000 investigations, but he did not go on to tell us that of those only 28 prosecutions were generated. The child care providers investigation did not result in a single prosecution, nor did the investigation of employers. So whatever applies to the rest of us as regards the wages of sin, as far as the Government are concerned employers are saintly and immune from sin, because employers are never involved in fraud. The Government are being complacent and we are disappointed by the Financial Secretary's response.