Amendment moved [this day]: No. 23, in page 21, line 40, at end add—
'(3) The Secretary of State shall within one year of this section coming into effect and every year thereafter make a report to 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.'.—[Mr. Clappison.]
I welcome the Paymaster General to our deliberations on this important clause. The Financial Secretary was present for the debate this morning, but we entirely understand that he cannot be in two places at the same time and he has to be in the Chamber to reply to the debate on the Public Accounts Committee. He is not with us, but the Paymaster General is with us instead and they will have liaised on the points that were made this morning. I raised some detailed points to which I did not necessarily expect the Financial Secretary to have answers to at his fingertips and I said that it would be satisfactory if he wrote to me in good time.
However, some general points remain on which I seek an answer from the Paymaster General. It is apt that she is here for this debate, because she and I have debated the incidence of fraud in the working families tax credit and have corresponded about it in the past. The debate gives me another opportunity to ask her again—I put the same question to the Financial Secretary this morning—how much fraud there is in the tax credit system.
That question will not come as a surprise to the Paymaster General, as we have debated the issue in the past. On 11 April 2001 she was good enough to write to me following the debate on the uprating order. I am sure that her memory will not need jogging, but she will remember that last year there was a special uprating order for the working families tax credit because, in addition to the inflation-linked increase in April last year—I was about to say ''miraculously''—somehow the Government also decided to increase the working families tax credit by an additional £5 above inflation in June last year. The Paymaster General will remember speculating about the timing of that increase and how it came about. She will also remember the letter that she wrote to me on 11 April 2001 in which she said:
''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.''
The period of 12 months ended in September last year, so we should like to know from the Paymaster General whether, as is presumably the case, that benchmarking exercise has been completed, whether Ministers know the results and whether they plan to put the results in the public domain, so that we all know the extent of fraud in the working families tax credit system according to the Inland Revenue.
We also want to know generally what the Government's plans are for tackling fraud, a general point that we raised this morning. We want to know what their plans are for Departments to work together, given that responsibility for these areas has now been fragmented between the Department for Work and Pensions and the Inland Revenue, and also what plans the Government have to work with local government and the private sector in tackling fraud.
I also want to ask the Paymaster General a question that was not raised this morning, which I had planned to ask if there had been enough time. Is it planned that the Inland Revenue should participate in the credit industry fraud avoidance system? She may be able to write to me on that rather than answer the question now, but we should like an answer at some stage.
We also want to know whether the Government have plans to widen the scope of inquiries into tax credits, something that comes under the Paymaster General's ambit. We understand that the Inland Revenue opened inquiries into 1.5 per cent. of tax credits. How was that figure arrived at as the proportion of tax claims to be investigated? We understand from the Inland Revenue's annual report that 28 per cent. of those inquiries found instances of non-compliance. It would be interesting for the purposes of the debate if the Paymaster General could tell us how many of those cases involved fraud. As we said this morning, we believe that there are too few prosecutions for tax credit fraud. I shall not go over those points again. I am sure that the Paymaster General will be familiar with them anyway, because she has divulged the information to me in written answers.
We also want more information about the use of the civil penalty in cases of fraud. In the first two years of working families tax credit 478 penalties were imposed in respect of claims—about 240 each year. Given that penalties can be imposed for negligence as well as fraud, how many were imposed for fraud? We can reasonably expect the Government to have a record of that, and again it would be interesting to have an answer.
We seek answers to all those questions because we believe that fraud is an important subject. We do not seek to draw a connection between fraud and anything else. We believe that fraud in itself is bad and we believe that that view is shared by the majority of the public, both taxpayers and recipients of tax credit. We believe that it is in the interests of all of us to take a vigorous approach to tackling fraud. Certainly Opposition Members seek such an approach. We
intend to hold the Government to account for what they are doing.
I have some sympathy with the amendment. I believe that we all agree on the importance of tackling fraud, but in some senses working families tax credit fraud has probably not been approached with the vigour that the Department for Work and Pensions would have us believe it accords to benefit fraud. I would not dream of suggesting that the Treasury is less vigorous in these matters than the DWP, but the DWP issues press releases on this subject roughly weekly, so it must be active. I hope that the Treasury is as well.
The amendment would require a report in about a year's time on what the Government have been doing on tax credit fraud, which would be welcome. To be fair, the Government have taken one important step on fraud, which is to make an attempt to produce a baseline figure. As the hon. Member for Hertsmere (Mr. Clappison) suggested, that process is proceeding rather slowly; we do not seem to have got there yet. However, given the many decades in which levels of fraud were not even measured accurately, so that we could tell whether we were making progress, at least we seem to be making some headway.
The hon. Gentleman mentioned an aspect of tax credit fraud which, as he rightly said, I had raised in a written question to the Paymaster General. At that stage she could not give me an assessment of child care tax credit fraud, but is she aware of the relatively recent reports that suggest that child care providers are getting fed up? The scam appears to be that parents who know how to work the system book a child care place for six months or a year, get the provider's signature on the tax credit form, send the form in, get the child care tax credit for a six-month fixed period under the present regime and then do not turn up. The providers are being messed around quite badly and are feeling aggrieved. I suspect that if they had been aware of the child care tax credit fraud hotline, to which our attention was drawn this morning, they might have rung it, but I also suspect that many of them are not aware of it or simply do not bother. Clearly that is both fraudulent as regards the public purse and disruptive for child care providers. What spot checks are undertaken by the Treasury once an award has been made and will they be any more vigorous under the new regime of working tax credits and child care tax credits.
I give the Government some credit for trying to assess the extent of fraud in various parts of the system, although they have not quite got there in relation to tax credits. An annual report of the sort envisaged in the amendment would be a useful prompt and would apply a little more pressure. That would be welcome.
As we are also debating clause 33 stand part, I want to raise the wider point of concern that the Bill will lead to a great deal more fraud and questionable behaviour. I do not intend to repeat the formidable arguments advanced by the right hon. Member for
Birkenhead (Mr. Field) on Second Reading, which I am sure that he will repeat on Report and Third Reading. I hope that there will be more opportunity to comment on the subject in relation to new clause 13.
We have learned and understood that in the interests of continuity several requirements in the administration of tax credits will be relatively fuzzy. The Financial Secretary told us that he sees the complexities as being analogous to those of a television, in that people will be able to switch on their entitlements without understanding how the system works. However, it has been a sound tradition of Anglo-Saxon law to try to achieve maximum legal clarity so that people know whether they are on the right or the wrong side of the law. As the Paymaster General will know, I have on many occasions argued against the dangers of bracketing or muddling together tax evasion and tax avoidance. Where that has happened in continental Europe, notably in Germany, it has led to widespread social condoning of tax evasion. That is why the Germans wanted the withholding tax.
There are grey areas in the Bill. For example, it is not clear whether overpayments will be refunded or to what extent the Inland Revenue will be able to be more rule-driven about people's entitlements, and people will not be required to undertake formal reporting of their circumstances. I fear that that will lead to the kind of fuzziness that leads people to condone actions that are not wanton fraud but are slightly over the line. That is apart from the possibilities for fraudulent collusion between employers and employees that worry the right hon. Member for Birkenhead. We risk encouraging such behaviour if we try to make arrangements that are not too onerous for claimants who may not want to—or even be able to—deal with a more demanding regime.
That brings me back to negligence and fraud. For the reasons that were given, I agree that it is wrong to bracket the two. Apart from the danger that claimants will not really know what they are entitled to, as people learn the ropes they will develop bad habits. They will find out what the Revenue does not check or investigate and develop wheezes such as the child care providers wheeze described by the hon. Member for Northavon. The machinery needs to be much tighter. Perhaps this is only a framework Bill providing for various regulations that will ultimately achieve that. However, the explanations of the Government's intentions that we have heard so far have led me to catch a nasty case of unease from my hon. Friend the Member for Hertsmere.
The practices that may develop are not of a wickedly fraudulent nature or liable to send their perpetrators to prison, but wheezes that are wrong in themselves, cost the taxpayer a lot of money and lead to further clouding of the sound Anglo-Saxon approach of precision regarding what is within or not within the law.
This is a good clause, and we owe it to the Bill and to the taxpayer to spend some time on it. I welcome the Paymaster
General to the Committee. She should not be held responsible for the observations of a colleague, especially as she was not in the Room, but the Financial Secretary accused Conservative Members of indulging in gesture legislation. That is not what we are doing, and I regret that he took that view. It would be a dereliction of our duty and a disservice to the taxpayer were we not to examine the provision very carefully.
I do not want to spend the entire sitting quoting the comments of the right hon. Member for Birkenhead, but given his great knowledge of the subject—no doubt he will have plenty more to say on Report—it is worth going over some of his concerns about tax credits. He said:
''It would be difficult to operate this system honestly in the Garden of Eden, let alone the real world.''
He went on to estimate that the level of fraud against tax credits is at least as high as that against conventional welfare payments such as housing benefit, which currently runs at about 70 per cent. Perhaps regrettably, we inhabit the real world, not the garden of Eden, so that was a pertinent comment.
I grant that no Government should be put off their legislative programme because of the possibility of fraud. That would be utterly ridiculous. However, in instigating new legislation they have a duty to ensure as far as they can that fraud is not an option, or at least not a welcome option. The thought of the Garden of Eden and the temptation to err reminds me of an incident from my days in the armed services, when I had some money removed from my room in the barracks where I was stationed. The miscreant was apprehended and suitably punished, but I was punished with equal vigour on the grounds that I had put temptation in his way. I did not see the justice in that, but having had time to reflect in the intervening 20 years I can accept that it had some logic, even if it was a little warped. It was a salutary lesson.
When the working families tax credit and the disabled person's tax credit were first introduced, questions were asked about the scope that they presented for fraudulent claims. Again, I must refer back to the right hon. Member for Birkenhead, who was instructed by the Prime Minister to go away and think the unthinkable on the whole area of welfare reform. He took him at his word and was summarily dismissed, which makes one suspect that the best policy for advancement in the Labour party is not to think at all. In 1998, he warned that
''the whole of the family tax credit venture is fraught with great dangers. It offers huge bonuses for dishonesty. It strengthens the employer's hold over working people—'these are the conditions: cheat and both of us will be better off.' It thereby pulls employers into a spider's web of dishonesty and corruption. It rewards employers paying low wages. It takes the pressure off improving productivity and thereby the scope of increasing real wages.''
My hon. Friends the Members for Arundel and South Downs (Mr. Flight) and for Hertsmere have argued well that a distinction should be drawn between those who commit deliberate fraud and those who do so inadvertently. Although we touched on that issue in previous sittings, I would welcome the
Paymaster General's thoughts on it. We should also remember the story of individual learning accounts, to which reference was made this morning. They raised the hopes and aspirations of those who subscribed to them—many such people were my constituents—only to be dashed when the entire system was withdrawn because of fraud. We therefore owe it to the taxpayer and to our constituents to ensure that the Bill will stand the test of time.
On benefits, it is perhaps worth considering the experience of other countries. In Canada, the extent of fraud in the working income supplement, or WIS, was so great that it is returning to a benefits-based system. Lessons might also be learned from the United States, where the earned income tax credit has led to tremendous problems with fraud. An Internal Revenue Service study of tax compliance, published in early 1997, found that taxpayers claimed $4.4 billion more in earned income tax credit refunds than they were eligible to receive. Between 1986 and 1996, federal spending on earned income tax credits increased from $1.7 billion to $18 billion, leading The Economist to state in 1995:
''There is no longer consensus that the ETIC is a sensible addition to America's anti-poverty programmes.''
Yet, as has been said, one of the main tenets of such legislation is to combat poverty.
Applicants for the working families tax credit and the disabled person's tax credit are asked to provide documentary proof of earnings. Where they are unable to do so, employers are asked to provide such details. However, in line with efforts to encourage electronic applications, to which the Paymaster General referred in a previous sitting, claimants for the new tax credits will not be asked to provide documentary proof of income with their application, although the Inland Revenue will reserve the right to check the information provided by consulting them or their employers. According to the Government, that
''will remove the need for the Revenue routinely to contact employers for proof of an employee's earnings.''
Does my hon. Friend agree that the risk with such legislation is that those who try to commit fraud and are challenged by the Inland Revenue to produce documentary evidence will be able to say, ''Oh, it was a mistake''? Removing the requirement to produce documentary evidence at the outset will enable more people to claim that they made an honest mistake.
My hon. Friend is entirely right, and I hope that he will return to that point in his speech.
Because of the Government's determination to pay tax credits through the payroll, the Inland Revenue administers them. As I understand it, they are therefore not subject to the new powers in the Social Security Fraud Act 2001, which aims to reduce the cost of welfare fraud. In introducing the Bill, it should be the Government's aspiration not only to increase benefits to those who need them most, but to reduce the amount of welfare fraud. As the hon. Member for Regent's Park and Kensington, North (Ms Buck) pointed out, to do so would ostensibly release more
funds to those who need them—an aspiration with which we can all concur.
This perceived inconsistency was highlighted during consideration of the Social Security Fraud Bill. However, the Government affirm that such payments are tax credits and, as such, cannot be aligned with other welfare benefits.
This morning, my hon. Friend the Member for Hertsmere questioned the Revenue's target of investigating 1.5 per cent. of applications per tax credit. I mentioned that subject on Tuesday morning, and asked the Paymaster General how that figure was arrived at. She replied that we were dealing with a different clause, but that we would doubtless return to the matter. We have, and I hope that she will enlighten us as to whether that figure was calculated, or is an arbitrary one plucked from the air.
This morning, the Financial Secretary talked about activity on the ground in pursuing those who abuse the system, and said that the commissioners would not hesitate to prosecute. More worryingly, he also said that the more substantial the fraud, the more likely the board's wish to prosecute. We all live in the real world—as I have said, we do not inhabit the Garden of Eden—but I should be extremely worried to discover that only those who make the headlines will be prosecuted, and that the intention is to go after only the big fish. The Financial Secretary suggested that this issue is related to the Conservative party's so-called new image, but that has nothing to do with it. It is a matter of common decency that everyone be equal under the law. Those who commit fraud, of whatever degree—
While the hon. Gentleman is on his feet, can he say whether the principle that he is outlining should also apply to the 26 million taxpayers? Rather large numbers of them occasionally make errors, and some find new wheezes to avoid paying the amount of tax that they should.
Exactly. The Paymaster General will doubtless wish to return to my valid point—my hon. Friends the Members for Arundel and South Downs and for Hertsmere also made it—about those who commit fraud through deliberate deceit, and those who do so inadvertently because of the complexity, to which I referred on Tuesday morning, of legislation such as this. The amendment argues for a stronger deterrent to protect people. We are talking not about a magic sum that the Government are handing out in a gesture of selfless kindness, but about taxpayer's money that will be taken out of one pot and put into another. As I said at the beginning of this debate, it would be a dereliction of our duty were we not to do everything in our power to ensure that fraud is kept to an absolute minimum, and that those who deliberately
perpetrate fraud are penalised to the absolute maximum.
Having been tempted by my hon. Friend the Member for East Devon (Mr. Swire) into speaking to this important part of the Bill, I do not wish to disappoint him. I want to talk relatively briefly about two issues related to fraud: the opportunity for connivance between employers and employees in committing fraud, and the extent to which the Bill's complexity might encourage people to commit fraud.
Connivance between employer and employee is an issue that has been raised on several occasions, and in that context I want to touch particularly on the thresholds for the notification of claims for reassessment. I am especially concerned about the threshold when salaries or incomes go up, not when they come down. Depending on how wide the threshold for notification of upward changes is, I wonder whether employers might be encouraged to strike a deal with employees, whereby pay rises will not go above the threshold so that the tax credit recipient will not have their tax credit reduced. From year to year, we might see employers restrict pay increases in line with their employees' wishes to such an extent that employees do not have to go through reassessment. Yes, they will be reassessed at the start of the next tax year, as was said in the debate last week.
Will the hon. Gentleman help the Committee by describing how the situation to which he referred will take place without showing itself in national insurance or tax returns, in an employment situation where the returns for all employees are going to the Inland Revenue, information is held on national insurance and tax, and the employer agrees, as many do, the rate paid with their employees? The employer would be inveigled in a very serious series of frauds.
It is not beyond the imagination of anyone who has been involved in business to envisage a situation in which the declared income of an employee could go up, which could be reflected in the returns, but in which that increase had been restricted so as not to go above the threshold. That would not be committing serious fraud. It would be the employer and the employee manipulating the system together. That is especially likely to happen in small businesses where wage arrangements are dealt with on an individual basis, rather than with large employers, where rate is often agreed with trade unions or employee representatives. In the small business sector, where things are much closer and tighter, such discussions might take place between employees and employers.
So the employer would be committing another offence under the Bill, putting an employee under pressure to collude in misrepresenting the returns on payment made to the employee, by deliberately manipulating the system.
We are talking about the way in which the thresholds could be exploited by employers or employees to achieve a better outcome. It is not unrealistic to think that connivance between employers and employees could happen, in the same
way that cash payments can be made by the agreement of both parties. It is possible that connivance might take place and that that might be fraud.
Is the circumstance that my hon. Friend has in mind a small business in which there is a discussion, leading to an understanding that pay will go up by, for example, 6 per cent., but because the threshold kicks in at, say, 2 per cent., the employer says, ''OK, we'll go on paying 2 per cent., and, when we're out of the tax year, you can have a bonus equal to the difference.''? That sort of collusion may or may not fall within an offence under the Bill, but people certainly will not think that it does. It will eventually kick in in the next year, but it is the sort of bad habit to which I was endeavouring to refer earlier.
I am grateful to my hon. Friend for that example, which is the sort of thing I have in mind. People might use the system in such ways to manipulate the terms and conditions of employees to the mutual satisfaction of both parties to the transaction.
That leads on to my next point, which is that the complexity of the system could give rise to behavioural changes. The Green Paper, ''Beating Fraud is Everyone's Business: Securing the Future'', said that complex rules make a great contribution to the occurrence of fraud. It stated:
''The detailed rules governing benefit entitlement, and contribution conditions, may also encourage behaviour which is fraudulent.''
The Green Paper identified three rules from which most fraud stems. They are:
''the rule that reduces income-related benefits when earnings cross a low weekly threshold; the rule that means that two people declaring that they live together as a couple receive less benefit than two who pretend that they live alone; and the rule that reduces income-related benefits where a person's financial capital exceeds £3,000.''
The latter point has been dealt with, in that the tax credit is based on investment income earned rather than on notional capital level, but the first two still apply in this situation. It will be interesting to see in the rules on benefit rates on the working tax credit in the Budget what the advantage and disadvantage will be for people declaring that they live alone or together. Comment has also been made on the type of event that gives rise to fraud in other benefits. Cohabitation, or failure to present that one is cohabiting, was a major cause of fraud in other benefits.
I am concerned that the complexity of the system may drive people to fraud either of their own volition or inadvertently. There are issues with processing delays. In my surgery, I have dealt with people who have put in a form for a benefit, and it has come back with a query, or more evidence is asked for. Such delays arise from the complexity of the system and people's failure to understand the rules and they encourage people to do such things as start work and not declare that they have changed their work status from unemployed to employed.
People working variable hours and in receipt of the 30-hour premium may, if they slip below 30 hours, fail to declare that their hours have fallen. That could be treated as fraud but, equally, could be classified as inadvertent error. People might not have been aware
of the complex rules around the hours and what would happen were their hours above or below 30 a week. Complexity will give rise to the opportunity for deliberate and inadvertent fraud against the Inland Revenue.
My hon. Friend is making an extremely valuable point about complexity. Does he agree that, on top of that, constantly changing rules are another source of non-compliance, if not fraud?
Indeed. My hon. Friend makes a very good point. This is a flagship reform, two years after the first legislation was implemented. The rate of change in this area will, I think, confuse enormously claimants and those administering the benefit. The transfer of responsibility from the DWP to the Inland Revenue may also create an atmosphere of confusion and bewilderment for those receiving and those administering the benefits.
Confusion and bewilderment could provide a smokescreen for the deliberate fraudster. I raised a point with my hon. Friend the Member for East Devon earlier about people submitting income data to the Inland Revenue without any documentary evidence and saying, when challenged, that they were sorry, they got the numbers wrong. Such situations will arise when people can exploit the rules. Fraudsters might say, ''That was an honest mistake, Guv, it's a fair cop'', when in fact it was a determined effort to defraud the Inland Revenue and the taxpayer of tax credits and taxpayers' money.
I am concerned about the complexity of the Bill and the fact that it could allow employers and employees to connive in a way that is against taxpayers' interests. We should all take fraud seriously. When I read the answer that the Minister gave to my hon. Friend the Member for Hertsmere, it disturbed me to discover that of 52,000 investigations into the working families tax credit over two years, 8,800 led to recovery and of those, there were only 22 prosecutions, 13 of which were successful. Is it clear in the message that is going out to those who claim tax credits that fraud is against the law and that the Government will clamp down on it? That message does not seem to be coming out clearly, and, referring back to the Green Paper on fraud, the Bill provides an opportunity for people to commit fraud deliberately or inadvertently.
I welcome you to the Chair, Mr. Beard, and apologise that I was not able to be here this morning to hear the first part of what is proving to be an interesting and important debate. My right hon. Friend the Financial Secretary gave me a full briefing on points raised. He is now detained on Government business on the Floor of the House.
I will briefly explain how the Government are approaching the question of compliance, and put it in perspective. I should not like to accuse the hon. Member for East Devon of gesture politics—well, not at the moment anyway—because I am sure that he would not accuse the Government of the same; I will return to his points.
When ensuring the smooth working of the tax credit system, as with the working families tax credit, it is important to detect early, and prevent, abuses that
may arise in the system. We do not pride ourselves on how many hundreds and thousands of our citizens we can take to court, even having failed to prosecute. A balance must be struck between ensuring that applications for tax credits are submitted correctly, and being able to identify errors, deliberate or mistaken, and correct them early on. That will be a deterrent in itself. Opposition Members talked about people learning of wheezes—they certainly do so in the tax system. However, I fail to see the point about those who seek to pay less tax than they know they should. I do not think that it is yet the policy of Her Majesty's Opposition to increase our prison population to prove the point about putting in one's correct return.
Mr. Flight rose—
Let me repeat my point. For better or worse, in the payment of taxation, there is a fundamental difference between tax evasion and tax avoidance—one is within the law, one is without. The Government do their best to counter tax avoidance with various measures; we have debated them in this Room on many occasions. Under the system of income tax, there are obligations to complete tax returns and to provide other information that the Inland Revenue needs. That is as well ordered as it can be. Under the tax credit system, parallel disciplines do not exist and, as I explained, the way in which it will operate will not be understood by people in the way that our tax system is now readily understood, although it has become complicated.
The Paymaster General rightly points out that wheezes will develop all over the place. I hope that she will accept my point in the spirit in which it is meant, but under the system outlined for tax credits, there is a greater propensity for wheezes to develop that are not within the law.
I shall address the points about the way in which the tax credit system will operate and how, at every point, the Revenue's duty is to ensure that the applications that it receives are correct. I shall not deal with the difference between evasion and avoidance, except to say that I do not believe that the line is as clear as the hon. Member for Arundel and South Downs suggests. Parliament's intent is clear when it says that the upper rate of tax on income is 40 per cent., and those who juggle with that know that intent full well. However, that is not a matter for the Committee and I should return to the amendments, because hon. Members have raised a number of important points.
I share with Opposition Members the view that the Government must be committed to tackling fraud and non-compliance and I do not dispute that we need an approach that deals with that issue. We are considering the approach that the Government
believe is most effective, which, as my hon. Friend the Member for Regent's Park and Kensington, North and other members of the Committee have said, must be proportionate. It has become a mantra in the Committee to talk about the need to strike a balance between enforcing obligations effectively and encouraging people to obtain entitlements. The Bill provides a route to balance those two objectives.
Before I deal with the new powers introduced by the Bill and the points raised by hon. Gentlemen, I will point out some of the structural changes that the new tax credit will bring about that will make the delivery system more secure. The first is the measure of income to be used. Income for the tax year, defined much more closely in line with tax, will reduce the scope for understating income and make it easier to cross check income figures with tax records and the information held by the Inland Revenue. Understatement of income is the most common abuse at present when a claim is found to be incorrect. Our experience teaches us that and we know how to deal with it.
The second point is one that exercised the hon. Member for Northavon (Mr. Webb) in particular. It relates to the nature of the new tax credits and their ability to respond to changes as they happen. As he said, support for child care costs needs to be matched more closely to actual costs. At present support for child care depends on the position when the claim is made. Once the child tax credit award has been made, it stays in place for six months. That is an important structural point that we needed to address. The hon. Gentleman also mentioned a matter that has been raised by the National Childminding Association and some private nurseries, which was that parents may register and take a place at the time of application, stay for a few weeks and then, when the payments are securely in place, remove their child from the facility.
Although we have had a great deal of anecdotal evidence of that happening, it emerged from the work that we did on this issue that, first, we needed to make it much clearer to child care providers what they were signing the form to indicate. That required us to give more business advice, which we have done, and much more support, so that child care providers understood what that meant, because many of them thought that they would receive the money direct.
Secondly, when we undertook spot checks to investigate cases, we found not that some children had moved when they should not have done, but that parents had moved their children to other providers whom we would still have recognised and paid for. None the less, there was a problem that niggled away, so we said that entitlement to the child care element would stop immediately the qualifying child care was no longer provided and we would put in place spot checks to ensure that that was done. Again, the information that we are collecting enables us to do that.
When we have constructed the compliance requirements, we cross check at every level to ensure that we are dealing with cases where the fraud is systematic, organised and, in some cases, a criminal activity. When we prosecute, we want to ensure that we are successful with the prosecution, because that is
the biggest deterrent. The other deterrent is that if people try to defraud the system, are caught and do not get the money, they will realise in the end that it is not as simple as they thought.
As we said in earlier debates, we shall also aim to make direct payments of tax credit straight into bank accounts wherever possible, to reduce the scope for fraud with other methods of payment. Fraud is occurring with giro payments: they do not reach the person they should reach, for whatever reason. Such payments are cashed into the system with different values and, because the order books are issued with several payments in them, the scope for fraud is large. We have also discussed in the Committee the need for sensitivity in dealing with that issue, but secure payment is another means of reducing the opportunities to use the money in ways that were not intended.
What approach does the Bill take to tackle non-compliance? In framing the compliance regime, we have carefully considered the framework, the terms, the levels of penalties and the circumstances in which they would be levied, the approach to fraud and the powers that the Inland Revenue needs. Where necessary, the Bill extends those powers beyond what is currently available. Therefore, the clause introduces a new offence of tax credit fraud and clause 34 extends the Inland Revenue's powers when investigating cases.
The Bill is designed to allow the Revenue to take an integrated approach to its tax and tax credit compliance work, using a co-ordinated set of powers to carry out effective checks and to eradicate errors, negligence—whatever we call it—or fraud on a level that can be dealt with, where the person no longer commits the fraud and is now complying. The hon. Member for Arundel and South Downs touched on that, when he implied that if we allowed too many wheezes to take place, it was a challenge to our citizens to find ways to evade the law. I do not necessarily accept that proposition, but in designing the system we have ensured that such opportunities are as limited as possible. We do not want people who claim the new tax credits to be fearful when they apply that a simple error, or even something that they would not have done but for tragic circumstances in their families, will bring the entire force of the Inland Revenue down on them. The balance that we must strike is between effectiveness and deterrence and dealing with fraud where we find it.
The Opposition's approach to the Bill is confusing. They claim that they want a system that is secure and that reduces opportunities for negligent or fraudulent behaviour, but they would cut back the powers on, for example, our ability to deal with such behaviour with employers and to increase the powers against claimants.
The hon. Gentleman must focus on whether he wants me to answer the questions that he has already asked or whether I should leave those to one side and debate with him now; I am happy to do either.
I understand that the Paymaster General wants to make her case and I am listening to it. I assure her that there is nothing in our amendments that would remove or reduce the powers to deal with fraud, whether an employer, a claimant or anyone else commits it.
Up-front checks into claims will be carried out to combat fraud. The automated system and data sources available to the Inland Revenue will enable it to use systematic risk assessments and screening techniques. Those changes will enable the cases that carry the greatest risk to be identified before payments are made. For fraud to be committed there must be intent and receipt of resources, we can prevent it by ensuring that people receive their fair entitlement. The Inland Revenue will be able to carry out further checks by using the powers provided in clauses 14 or 15 to ask for additional information or supporting evidence from the claimant before deciding whether to turn an award into payment.
The Revenue will carry out up-front checks on all claims. The initial automated risk assessment will identify those applications that present a high risk of non-compliance or fraud and therefore merit immediate consideration. These will be directed for immediate consideration to staff in one of the Revenue's research, intelligence and analysis teams. I am sure that hon. Members do not expect me to tell them and all those who look for wheezes exactly what our risk assessment is and how we will identify such applications. I shall try to give a broad indication, but the assessment becomes useless if it is known. The risk weighting used in the up-front screening process will be capable of being varied either centrally or locally in response to various factors such as changing perceptions of risk, which means that there is a risk assessment of our risk assessment.
The research, intelligence and analysis teams will also have access to third-party information and data from other sources such as self-assessment, and those will be available to assist them in identifying cases. Of course, we have national insurance returns from employers, so we can identify the type of risks to which the hon. Member for Fareham (Mr. Hoban) referred. Only a tiny percentage of employers may be tempted to think that they can make arrangements to depress wages or to operate some other form of wheeze, as it was described.
Data from all claims will be passed to a database, and will be subject to further profiling to select cases for inquiry. The Revenue will also carry out in-year
compliance work, which will identify cases where it merely suspects that an award is incorrect, even though it in fact established that such an award was incorrect. In such cases, further investigation might be required, just as apparently suspect claims will be subject to further investigation, as described in clause 14. Clause 16 therefore enables the Revenue to require information and evidence to help it decide whether there are reasonable grounds for amending or revoking an award, thus allowing it to take effective action during the year to prevent tax credits from being paid incorrectly.
Clause 18 will allow the board to carry out inquiries into awards after the end of a year. It will enable the Inland Revenue to implement an effective end of year compliance regime by empowering it to investigate awards and ensure that they are correct, and to amend or revoke them where they are not. The powers build on those already available during the year under clauses 14 and 16. The Revenue will also be empowered to require information and evidence from any person to whom an award has been made, provided that an inquiry has been initiated. The Revenue may obtain information from third parties—for example, banks—in accordance with regulations made under the clauses.
Before I move on to the specific points that were made about fraud, I want to stress that the system in the Revenue and the information that we have enables us to undertake all such work, and to assist in ensuring that the overwhelming majority of claims are correct. There are all manner of reasons for wanting to do that, not the least of which is that we do not want claimants to get to the end of the year and find that, for whatever reason, that they have been overpaid. Indeed, we have discussed that issue before.
Those are not the only powers, however, that will enable the Revenue to investigate fraud. The provisions that will empower the Revenue to tackle criminal fraud are contained in clause 34, and clause 33 creates the new offence. The most serious cases of fraud will be considered for criminal investigation and prosecution by the special compliance office. The cases pursued will be those where the applicant's actions are particularly offensive, including the use of false documents, repeated offending, collusion on the part of employers, or organised fraud by criminal gangs. A case that falls within the criteria, is considered for prosecution but does not proceed for one reason or another—for example, where it cannot meet the requirements for legal prosecution—will return to the compliance teams. The other powers for penalising the claim can then be considered. No case of suspected fraud should escape investigation entirely. That mirrors the approach to tax fraud, where similar considerations apply in deciding cases for prosecution. Interestingly, I do not recall that the hon. Member for Hertsmere had any objections to the provisions on negligence and fraud in last year's Finance Bill.
The Committee heard a great deal this morning about the work that the Revenue can do and how we can move through our prosecutions. I have also said
that the most serious cases will go forward for prosecution.
I want to deal with the hon. Member for Hertsmere's points about the number of cases and benchmarking.
I do not want to add more points, but I would like to sum up and repeat a point that I made at the beginning of our deliberations. The Paymaster General says that the Inland Revenue has greater powers in terms of inquiry and discretion than was the case with the former Department of Social Security and the old benefit regime, and that that is an important element in changing the administration from the DSS to the Inland Revenue.
I want to be careful with the question of discretion because it is a specific term. The Inland Revenue must follow the procedures that are laid down in the Bill, and it has no discretion to vary those powers. However, if by discretion the hon. Gentleman means that, on the first assessment of an application that clearly contains something that is incorrect the official concerned should return the form or make inquires, they have the discretion to move the form on although it may be incorrect.
We would monitor where there were repeated errors of a similar type. One offence that would make an application high risk over a period of time would be where there was repeated concealment that was discovered and corrected, and it happened again. That might trigger a further investigation. As I understand it—I shall double check this—there is no discretion for the Inland Revenue to say that it will not proceed to an investigation if the criteria are met. Prosecution is a matter of evidence being sufficient and the legal advice being the same as that which the Crown Prosecution Service would apply with regard to the use of public courts. I am uneasy about using the word ''discretion'' because it has a specific meaning in this area. If the hon. Gentleman will forgive me, that is something at which I shall look more closely.
The most serious cases go forward for consideration for prosecution, and I can update the figures. Prosecution orders have been issued in 40 cases of which 22 have been concluded. A further 100 cases are in the process of consideration, preparation and investigation. Of the cases that have been concluded, custodial sentences have been imposed in five, and they range from three months to two and a half years. Non-custodial sentences were applied in the other cases. I cannot tell the hon. Gentleman how many people were involved in each case. He will understand that we are looking at cases where there is a systematic number of people. I do not accept that the policy that we are operating is not working. In serious cases, a custodial sentence has a far greater effect than going to court and getting away with it, or a conditional discharge.
I shall now deal with some specific points that have been made during today's sittings. I have an example that sheds some light on our belief that an increase in the maximum penalties is unnecessary. One of the most serious cases of tax fraud in recent years was when, in February 2001, a tax barrister was found guilty of cheating against the public purse. I remind hon. Members that, as well as the provisions within the Bill, it is also possible to take a case where the custodial sentence is unlimited, or limited by the courts' discretion. Such a case is called cheating against the public purse. That would apply here.
On the range of criteria we are considering for serious cases, I can give a list of the criteria used when deciding whether to prosecute. They are deliberate concealment or deception; false or forged documents; certificates, statements or claims prepared with the intention to deceive; conspiracy; corruption; a second or subsequent serious offence; additional books or records for accounting tax contribution or other tax credit purposes prepared or used with the intention to deceive; organised or systematic fraud against tax contributions or the tax credit system; unusual frauds of novelty or ingenuity—that is a very interesting category; theft or misuse of Inland Revenue documents; and assaults on, threats to or impersonation of Inland Revenue officials. Clearly, that is an impressive range. The Inland Revenue's care and management power in securing the collection of tax demonstrates its wide experience and expertise in ensuring that it manages the system well.
The hon. Members for East Devon and for Fareham both mentioned the collusion of employees. I think that I have dealt with that in terms of examining other types of information such as the profiles of companies. The Inland Revenue also policies the national minimum wage. We have quite a lot of information that we can use. The Bill provides for information gateways to relevant Government Departments to ensure that we can use subsequent information to establish the facts, if we need to. That is dealt with carefully in the Bill.
Another issue is requests for information from claimants by the Inland Revenue. The hon. Member for East Devon mentioned that. Additional information that we might ask for includes bank statements, passbooks, payslips or receipts. That would be the sort of information we might ask for once we were investigating because we suspected someone.
The hon. Gentleman also referred to the experience of other countries. Canada's experience has led it to come back and design a system that is now very similar to ours. The United States has an interesting system, but ours is very different from it. The level at which payment is made and the way in which the system buttresses the Government's overall strategy in tackling poverty makes it different. France and Germany have been interested in our tax credit system because of its effectiveness to date. We have had much discussion with them about it, and we have given them a lot of information and support.
The hon. Member for Hertsmere mentioned 1.5 per cent., a figure that the hon. Member for East Devon also used. In explaining how the process works, I have tried to show that we do not set a percentage. Instead, we rigorously assess what is happening at every point and ensure that that is correct.
The hon. Member for Hertsmere mentioned data sharing.
I have other questions to ask about the 1.5 per cent. I presume that 1.5 per cent. relates to the number of inquiries generated by the system of risk assessment that the Paymaster General took us through earlier. The figure of 1.5 per cent. that I was quoting, however, came from the Inland Revenue's annual report, which said—I can find the document if she wishes—that it was the Inland Revenue's aim in its first year to undertake inquiries into 1.5 per cent. of applications. That figure came from the Inland Revenue itself.
I must be honest and say that, in my opinion, the figure of 1.5 per cent. is not necessarily a good guide to the system that I have described. I might need to look specifically at what that figure referred to, and I am happy to come back to the hon. Gentleman on it.
I suggested to the hon. Gentleman that I should examine that to make sure that we were talking about exactly the same thing because we are aware of high-risk areas because of the information that we hold. I referred to that at the beginning of my remarks. Those areas have our attention from the very beginning, whereas a compliance system operates for the vast majority. Unfortunately, it is necessary to give a certain profile of application more intense consideration from the very beginning. Before saying anything further in Committee, I wanted to check whether that 1.5 per cent. was referring to what we consider to be high-risk applications, which we would therefore already be looking at closely, as opposed to those of any risk, across the whole tax credit population. Given what I have described, I think that the hon. Gentleman will appreciate that 1.5 per cent. is not the only figure with which we are concerned.
On data sharing, hon. Members will know that there are strict legal obligations to maintain the confidentiality of the information that the Inland Revenue holds. I know that it is important that I assure the Committee as far as possible that the right processes are in place for fraud, but I am somewhat constrained. I should like to be able to give some examples, but unfortunately I am not permitted to do
so. I am sure that members of the Committee will understand why.
In the past, restrictions were a little tighter than was necessary, which hindered criminal investigations and prosecutions. That is why the Anti-Terrorism, Crime and Security Act 2001 provides additional gateways. The Bill will allow the Inland Revenue to disclose information for the purpose of assisting criminal investigations or proceedings, including where such proceedings should be brought to an end. Schedule 5 provides for sharing information with certain other Departments to achieve that.
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.
The hon. Gentleman asked about the hotline. I do not have that information to hand, so I shall write to him. In respect of progress since the Scampion report, I dealt with some of his points about co-operation on pursuing other kinds of frauds.
I have tried to cover the full range of methods that are available to the Inland Revenue in dealing with fraud. Those powers are proportionate, but it is a question of balance. As I said to my hon. Friend the Member for Regent's Park and Kensington, North, the regime must not deter people. The vast majority of claimants are law-abiding in seeking their entitlements. I hope that members of the Committee will agree that the arrangements in the Bill are satisfactory and that the amendment is unnecessary. If the hon. Gentleman feels that he must press it to a vote, I shall have to ask my hon. Friends to oppose it.
I can make common ground with the Paymaster General to the extent that this has been an important debate on an important subject. I thank her for her considered response, but I remain far from satisfied with some of her answers. I am grateful to my hon. Friends for their well-informed comments, which echo those made by many others, and to the hon. Member for Northavon for his remarks about the amendment. I think that most members of the public would also welcome such a mechanism.
We have achieved a measure of consensus. We all want to see fraud tackled; that is in everyone's interests, claimants as well as members of the public. I quote from the Chancellor's response to Lord Grabiner's report, ''The Informal Economy'':
''Defrauding the benefits system means defrauding the poor and preventing us getting the resources to those in need. We would be failing in our obligation to those who need the benefits system if we allowed people to defraud it.''
We can all agree with that. There is not necessarily a conflict between the interests of honest claimants and bearing down on fraud.
I concur with my hon. Friends about the complexity of the system. As my hon. Friend the Member for Arundel and South Downs said, there are several grey areas that need to be resolved. Fraud is fraud and it must be dealt with.
I take issue with the Paymaster General's remarks about prosecuting tax credit fraud and filling up the prisons with those who commit it. On the basis of the figures that we have been given, there is some way to go before that happens. The number has increased from three or four this morning to five this afternoon.
The Paymaster General said on Second Reading:
''The compliance regime for the new tax credits will be based on two principles: encouraging people to claim everything to which they are entitled, and providing an effective deterrent to the small minority—it is small—who try to cheat the system.''
That may be so, but given that 1.3 million people claim working families tax credit there may be many cases and a substantial loss of revenue to the Exchequer. If it is anything like the fraud that is prevalent in the rest of the benefits system, although it may be committed by a small minority of all those claiming it will still represent a substantial number who need to be dealt with. We must do everything possible to deter people from doing it.
''The Bill contains provisions to deal with non-compliance, including inquiry and information powers to uncover false claims, financial penalties when tax credits are falsely claimed, and powers to investigate and prosecute cases of criminal fraud.''—[Official Report, 10 December 2001; Vol. 376, c. 604.]
I hope that she does not envisage the possibility that there is a category of non-criminal fraud. All fraud is a crime because it is dishonest, and the powers to prosecute it have not been used satisfactorily.
The Inland Revenue's prosecution policy sounds impressive when one goes through all the features that may be present in a certain case, including conspiracy, repeat offences and impersonation of Revenue officials. The Paymaster General mentioned the use of false or forged documents. How many cases of working families tax credit fraud would involve the use of false documents? An applicant who intends to commit fraud will first fill out an application form, which will be a false document if they have put down untrue statements about their circumstances. That may be true in a large number of cases. This is only guesswork, but I suggest that although the Paymaster General says that the provisions are designed to bring about prosecutions in the most serious cases—ones in which there is realistic prospect of conviction, which is the general test for prosecutions—it would be hard to credit the figure of 40 prosecutions during two years in a system that involves 1.3 million people, or the idea
that every case that bears such features has been prosecuted.
My hon. Friend is making an important point, but I want to draw him back to the numbers in the written answer from the Paymaster General. There were 8,800 cases in which recoveries were made because of the overpayment of tax credits. I should think that many of those involved the offences that the hon. Lady mentioned, such as the impersonation of Inland Revenue officers or the provision of false or forged documentation. However, less than one quarter of 1 per cent. of such cases led to a prosecution. Surely, that indicates that prosecutions are not being pursued vigorously and the Government do not take the matter as seriously as they should.
My hon. Friend is absolutely right. We are worried that insufficient numbers are being prosecuted. The Paymaster General says that we have a select system of prosecutions, but it must be extremely selective to generate such a small number. We find it hard to credit that a vigorous prosecution policy lies behind that. Fraud is a criminal matter and should be treated as a crime.
On the question of investigations that precede prosecutions, I hope that I can clear up the conflict between myself and the Paymaster General on the figure of 1.5 per cent. As I said, that figure came from the Inland Revenue's annual report, which is the only source of information that we have. It states:
''During our first full year, our aim was to open inquiries into 1.5 per cent. of applications. The process is supported by a risk-based scorecard, matching of data with other Government Departments and allegations from the public.''.
It goes on to set out the number of inquiries that have taken place:
''We found non-compliance in 28 per cent. of cases''.
From that report, I understood that the system of risk assessment, which the Paymaster General took us through at some length, had generated the figure of 1.5 per cent. She is shaking her head but given that that figure was in the report, can she tell us what proportion of cases were in fact investigated? We would be grateful to know the figure that was generated by the risk-based assessment, whether or not it was 1.5 per cent.
It is striking that the risk-based assessment led to a finding of non-compliance in 28 per cent. of cases. That is a high figure. The figure for cases of lower risk may be less than 28 per cent., but that could still generate a substantial figure across the tax credit framework. We need more information on how many claims, as a proportion of cases, have been investigated.
We should also like to know about penalties—the Paymaster General did not answer the point that was made by my hon. Friend the Member for Fareham. Given that there are so few prosecutions, and that the only other way in which cases are dealt with is by civil penalty, what proportion of penalties were imposed for fraud and what proportion related to negligence? We know that information systems have not been
good in the past so the Government have hardly any record of how much has been generated by penalties. In a parliamentary answer, the hon. Lady said that it was £50 over two months, but the information-keeping system has not been good and we need better information.
We also need more information on the ballpark question of how much fraud is in the tax credit system. What is the Government assessment of the amount and extent of fraud? That remains unanswered thus far, so I will study the hon. Lady's remarks carefully. Can she tell me about the outcome of the benchmarking exercise and what will be made public? We do not want anything that would encourage or enable people to commit fraud to be made public, but the Department for Work and Pensions has given its assessment of fraud across the benefit system, and we cannot see how a simple assessment could generate more fraud. As the Government have said in the past in their Green Papers on fraud, it is essential to know how much fraud there is in a system before one sets out to tackle it. We believe that the Government's assessment of the amount of fraud in the tax credit system should be put in the public domain.
I made that the starting point of my opening remarks this morning. I reach my concluding point, and the question remains unanswered. I shall study carefully what the Paymaster General has said and reflect on it, but I am unsatisfied. Although I shall not press the amendment to a vote, it raises an important subject that I want to think about carefully. Having done so, I may well want to return to it on Report, but, for today, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 33 ordered to stand part of the Bill.