Clause 5 - Period of awards

Tax Credits Bill – in a Public Bill Committee at 5:15 pm on 15th January 2002.

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Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs 5:15 pm, 15th January 2002

I beg to move amendment No. 15, in page 3, line 40, leave out subsection (1).

Photo of Edward O'Hara Edward O'Hara Labour, Knowsley South

With this we may take the following amendments: No. 45, in page 3, line 41, leave out 'whole' and insert 'first 6 months'.

No. 64, in page 3, line 44, after 'made', insert

'or is treated as being made,'.

No. 46, in page 3, line 45, at end insert

', or six months after that date, whichever is sooner'.

No. 53, in page 3, line 45, at end insert

'; and where such a claim is made within a period to be prescribed by regulations before the end of a tax year, it shall also be deemed to have been made in respect of the following tax year.'.

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

As hon. Members will be aware, the clause sets out the length of time that tax credit awards will last and what will bring an award to an end. The

arrangements are by no means clear. If, for example, a couple ceased to be entitled to a joint claim, it would come to an end, or vice versa, if an individual became part of a couple. However, a change in circumstances does not necessarily bring a claim to an end, except if the claimant no longer meets the conditions for a tax credit. In other words, if a tiny entitlement remained, the claimant would as a result, as I understand it, continue to receive a larger tax credit.

The second big issue relates to the definition of hours worked. If a claim is permitted before the tax year starts based on the previous tax year, is it based on the hours worked in the previous tax year or on the hours expected to be worked in the ensuing and current tax year?

I appreciate that our amendment may partly defeat the intention of the Bill, because it proposes that claims should not be made in advance before the tax year starts and before people know what their circumstances are. The Liberal amendments follow the existing practice in limiting the time period for claims in advance to six months.

We are concerned that an unclear and complicated system for making claims in advance runs the risk of leading to major problems in recovery if claims are excessive, to substantial legal costs and to the inevitability of moneys going astray and that the provisions of the clause and subsequent related clauses are sufficiently loose to threaten a shambles.

If the Government wish to stick to this system for administrative reasons, other areas must be tightened up, but at least one approach is that suggested by our amendment—to deal with claims on the basis of the year in question and not on estimates which may or may not be favourable and which many people who do not know what their working hours will be, may find difficult to make.

Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions

I want to respond briefly to Conservative amendment No. 15 and say a few words on the first three of the four Liberal Democrat amendments. I know that my hon. Friend the Member for Teignbridge (Mr. Younger-Ross) will seek to catch your eye, Mr. O'Hara, to say a few words on amendment No. 53.

Amendment No. 15 would not allow a claim for a tax credit in advance of the year in which it was to be paid. While I understand the concerns about forecasting incomes, which I am sure we shall return to, the amendment would prevent historic data being used as a basis for a subsequent claim, even on the day before the start of a new tax year. Given the strong case for using historic data, and that is the direction in which some of the poverty groups would want to go, it could be counter-productive to remove that power. I should be interested in the Minister's comments.

Amendment No. 64, which inserts the words

''or is treated as being made''

after the word ''made'', is intended to achieve consistency. Clause 4(1)(b) refers to a claim for a tax credit being made in prescribed circumstances

''to be treated as having been made on a prescribed date''.

Therefore there is a provision in the Bill that relates not merely to the date on which the claim is made but to the date on which it is treated as having been made. Our question is whether that terminology should run through the Bill, so that subsequent references to when claims are made should also allow for the possibility that the date on which they are treated as having been made might be the relevant one. We have tabled the amendment once rather than 65 times, to see whether there is any substance in the point.

Our amendments Nos. 45 and 46 go to the heart of one of the two key issues of the new tax credits—whether it is sensible for them to run for a whole year. Clearly it is a question of balance and there is a trade-off here. The amendments enable us to raise our concerns about paying people a sum of money for a year.

The first concern is that, although there is provision for reassessment during the year, it may not happen. I am not saying that it will never happen, but that, for a variety of reasons that are not too difficult to imagine, some of the people whose claims should be reassessed during the year may not apply for reassessment. Therefore, at the end of a year people could find that they had been substantially overpaid. In an extreme case, somebody who anticipated, in good will, that they would be working an average of 30 hours a week might find, when looking back at the year, that they had worked 29-and-a-half hours a week. Their whole payment, including working credit, might turn out to be invalid. We could be talking about hundreds, perhaps thousands, of pounds in overpayment and the longer the period of assessment, the bigger overpayments will be. Because we are talking about low-income groups—high-income people get their flat rate child credits, analogous to the children's tax credit, so this is not an issue for them—the burden of repaying overpayments is more acute. The purpose of the amendment is to say that if things are allowed to continue for 12 months, large overpayments could result and make life a nightmare. Just as there is a take-up issue with claiming credit, sure as eggs is eggs, there is take-up issue on reassessment. Those who have claimed money do not always realise that their circumstances have changed sufficiently to warrant a reassessment.

Photo of James Clappison James Clappison Shadow Spokesperson (Treasury)

I am listening carefully to the hon. Gentleman. Does he agree that somebody who discovers that they have received an overpayment is in a difficult position and possibly in the way of temptation? Many cases of fraud may arise because people do not declare a change in circumstances when they should. The circumstances that the hon. Gentleman outlines could be difficult for the person concerned.

Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions

I have some sympathy with the hon. Gentleman's comments. When prediction is involved, there will be a grey area between people who, in good faith, make a mistake about how many hours they will work or what there income will be and those who wilfully misrepresent their circumstances. The division between those two groups is far from clear cut. The longer we allow matters to continue unreviewed,

unchecked and unassessed, the greater the danger and the larger the sums that will be involved.

In a similar vein, a corresponding danger exists for underpayments. The longer the set period of assessment, the more suffering that will occur for someone whose circumstances change and whose award is too low relative to what they would be entitled to were they reassessed. One could argue that if a person lost overtime or one day's work a week, they would know that they were worse off so would ask for a reassessment. However, we know that the world is not like that in reality. There will be a threshold for making reassessments and if a person stands to gain £5 a week of tax credit because of a change in circumstances, they may not pass the threshold for reassessment. In practice, a person would have to work out whether what had happened to them was big enough to warrant reassessment—we will be getting into difficult sums. If something happens in month three of a sixth-month period, people might get by for two or three months, then have a reassessment and catch up. However, what happens when something occurs in month one and the person does not get reassessed for 11 months? Lasting 11 months on an inadequate income—

Photo of Mark Hoban Mark Hoban Conservative, Fareham

Does the hon. Gentleman think that the position will be exacerbated when claims are rolled over from one tax year to another, as the Minister indicated will happen on the previous clause? If a person receives a piece of paper through the post that states their circumstances, they may not look at it. They could put it on their to-do list, not look at it again and be underpaid or overpaid as a consequence of an administrative procedure, which the Minister believes will make life easier for those claiming benefits.

Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions

I understand the hon. Gentleman's point and he raises an important issue, which could be dealt with by shorter periods of assessment. I have some sympathy with the rolling over principle. Trade-offs must happen and rolling over in circumstances where nothing much has changed will cut administrative costs, increase take-up and help everyone. However, if rolling over happens in circumstances that have changed, a person may not realise that they are above a threshold. That could continue for another year, or more, and could be a problem. Real dangers are associated with a long period of assessment and the option of reassessment is not a defence. It will help extreme cases in which it is blindingly obvious that things have changed so much that a person should be looked at again, but there will be cases somewhere between negligible change and extreme change in which we will want people to get help and in which they would suffer if they were to get the wrong rates for the best part of a year.

I touch briefly on the question of whether it would cause administrative chaos to have six-monthly instead of annual assessments. The jury is out on that because there will be people who will in any case have one, two or more reassessments under the Bill. Institutionalising the fact that people might have two assessments a year by allowing for six-monthly awards will not add to the number of assessments in some cases. If someone's

circumstances change a lot, they will already have two, three or four assessments a year. To provide automatically for two assessments will not necessarily create a huge increase in bureaucracy.

One might draw a distinction, which I do not think has been made in our discussion so far, between the people who are getting only what in the current system is the children's tax credit—the part that almost everyone gets—and those who get what is currently the tapered working families tax credit. The latter group are on lower incomes and more vulnerable and, for them, getting by on the wrong amount might matter more. The people at present on the children's tax credit can have huge variations in their circumstances without their entitlement being affected. Unless they go well into higher-rate tax, CTC does not get tapered away altogether, but the working families tax credit cuts out at middling incomes. There is a big chunk of people about whom we perhaps do not need to worry if they do not have six-monthly reassessments. It might be possible for them to roll on automatically for a year. The people we would then catch would be those whose circumstances change and who would really suffer were they not reassessed.

This is a big and radical issue for us. I understand the philosophy that says that it is all related to the tax system, although to be honest, it is related to the tax system when it suits the Government and not when it does not. We have joint assessment, which has nothing to do with the way in which the tax system works, because it makes sense for tax credits. In some respects, this system resembles the tax system, but not always. To put it charitably, if the desire to look too much like the tax system is at the expense of claimants' welfare, we need to think again. I hope that the amendments have put that important issue on the agenda.

Photo of Richard Younger-Ross Richard Younger-Ross Liberal Democrat, Teignbridge 5:30 pm, 15th January 2002

I am not too sure whether the Minister has pre-empted what I want to say, but I wish to pursue him a little further.

What we are concerned about through amendment No. 53 is that we do not get to a position from reading the Bill in which a claim could be made in one week, but then, because 1 April has come round, it has to be made again. That would be totally stupid. The Minister's earlier remarks make it clear that there will be a roll-on: an application shall be deemed to apply for the following tax year. However, I am not too sure whether, as the hon. Member for Fareham (Mr. Hoban) said, that will happen year on year on year so that a person could be deemed to have claimed for 10 years, or whatever. I know that I am being extreme, but it was not made clear in what the Minister said earlier. Can he clarify what period is intended? Obviously, to have to re-fill out a form after one week would be inappropriate, but will it be two, three or four weeks, or will a claim roll on year in, year out?

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

This has been an important debate, going to the heart, as does clause 5, of one of the most fundamental principles of the two new tax credits. That is that the period of the tax credit award should be linked to the tax year. Amendment No. 15, as the hon. Member for Arundel and South Downs was good enough to say in his opening remarks, challenges that principle. However, the hon. Gentleman did not make clear what his party would propose as an alternative. Of course, he does not have to, because it is for us to propose and the Opposition to oppose. That is what they are about. However, the hon. Gentlemen who speak for the Liberal Democrats do have a clear alternative, to which I will turn, which is that the period of the award should be restricted to six months.

Of course, the existing WFTC and DPTC are currently awarded for fixed periods of six months, and there are undoubtedly strengths in that approach. The fixed award provides certainty for claimants for those six months, but that inflexibility is also, in our view, a weakness. It makes it very difficult, except in limited cases, for the system to respond as people's circumstances change. It is important to understand that we want people to get what they are entitled to when they need it. It is not a question of seeking to develop a system that has two automatic reassessments during the year, which is presumably what would be achieved by a six-month period. We want to encourage people to tell the Inland Revenue about changes as they happen, rather than having a fixed, inflexible system of in-year assessments.

The new credits are designed to combine the advantages of a continuing award with the ability to adjust awards as changes occur, without additional burdensome requirements for claimants. By linking the period of the award to the tax year, we can make it easier for families to claim, provide continuity for those whose circumstances are settled and allow greater flexibility during the course of the award when it is needed. It is therefore important to stress—this deals with a point that several hon. Members, and certainly the hon. Member for Arundel and South Downs, made—that claims will not be rolled over except for people who have been on income support or JSA and are entitled to full CTC throughout, or for people who are clearly entitled only to the family element of CTC.

The scenario in which there is roll-over for year on year and in which it is possible for there to be wrong assessment, accumulated debts or underpayment is not likely to occur in real life. The new credits will be based on the annual income in a tax year and run for up to a year. Measuring income over a year fits better with the tax system and enables people to use the same information for their tax credits as they have to provide for income tax purposes. Crucially, it provides a fairer measure. I do not therefore accept the criticism that the whole scheme is based on aping the benefit system when it suits and the tax system when it suits. It is designed to move us towards a new system that is integrated, targeted, provides resources that take into account people's overall tax and national insurance contributions, and gives them the money when they need it.

The system is a new departure and we make no apology for that. It is a radical measure and we make no apology for that. It is a departure from the way in which things were done in the past. The National Association of Citizens Advice Bureaux does invaluable work in the wider community, advising our constituents, and is now working closely with the Inland Revenue on a range of issues. It has written to hon. Members and it is interesting that it is not calling for a return to the six-month period, as Liberal Democrat Members are doing. It raised various issues, to which we must be alert, concerning the 12-month period, but we believe that that is the right period. It will reduce the scope for manipulating income over a short, snapshot period, make it easier to check against tax records—Opposition Members expressed concern about fraud and temptation—and will be equitable for those with fluctuating and steady incomes.

The hon. Member for Arundel and South Downs asked how hours of working will be defined and we shall come to that on clause 10. It refers to qualifying, remunerative work, which will be defined in regulations. We want to look at the hours that people are working at the time of making a claim. If a claim were made in advance on the basis of expected hours, it would not become valid unless the claimant had started work and was working those hours. This is a tricky area and before drafting the regulations it will be necessary to have discussions with interested groups and reflect on possible definitions. I am happy to assure the hon. Gentleman that that will take place. However, we shall proceed on the basis that enables us to introduce a system that does not impose added burdens on claimants. I shall give an example.

The emphasis is on looking at current circumstances. If someone stops working 16 hours a week after six months, their entitlement will stop, but they will not lose their entitlement for the first six months. That is an important distinction when it comes to overpayment and possible claims back. That entitlement will stand and income will be assessed annually, but not the other circumstances that may affect the award. It is a question of balance and we believe that we have got it right. The annual system will produce a real gain for families and their employers. The current system in which information is gathered annually for tax purposes, but tax credits are assessed on a number of weeks of earning causes extra hassle for claimants and employers, who must deal with two systems at once. On Second Reading, concern was expressed and consideration was given to the burden on employers. We want to minimise that burden. The clause helps to streamline the way in which tax credits interact with the income tax system. Families' tax liabilities and tax credit entitlements will fit more closely together.

Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions 5:45 pm, 15th January 2002

I wonder whether the Minister is overstating the gains on two fronts. Employers will still be told how much tax credit to pay and will still deduct PAYE as separate transactions. An annual assessment is neither here nor there and will make no difference to employers. Likewise, the client group for

the working families tax credit part of the scheme does not usually fill in tax returns because the majority of them have the right amount of income tax collected cumulatively through PAYE. Again, assessing them over a year or six months is administratively neither here nor there.

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

The issue cannot be dismissed as blithely as the hon. Gentleman suggests. We are moving towards integration of the tax and benefit systems so that the position is simplified for people and the resources they need to combat poverty are available as and when they need them. Employers certainly do not want a stop-and-start process involving changes in their payroll system every six months. That is a danger in the proposals of the hon. Member for Northavon. The measure provides important and practical benefits for families. I accept that a judgment must be made and the argument must be balanced. The issues are complex, but we believe that we have got the balance right.

The purpose of amendment No. 64 is to make it clear that references to the date on which claims are made include claims that are treated as having been made on a different date. For example, when a claim is made in advance of the relevant criteria being met, it is treated as being made on the date on which they are met. I understand why the amendment was tabled, but I can give an assurance that it is unnecessary. Once a claim is treated under clause 4(1)(b) as being made on a different date from the actual date, the first date becomes the one that counts for all later purposes in the Bill. The amplification suggested by the amendment is unnecessary.

On amendment No. 53, one of the guiding principles of the new system is that the claims process should be user friendly and assessable. To require two claims in quick succession when someone enters the system close to the end of a tax year—the hon. Member for Northavon referred to this—might be cumbersome to claimants. I shall explain how the process is intended to work in such cases, which may allay the hon. Gentleman's concern. When someone makes a first claim near the end of a tax year, the claim will be effective for the short period remaining in that year. However, it also gets the claimant on the books so that their claim for the following year will go through the renewal process with those of other recipients. The renewal claim for tax credits does not have to be made from scratch on a new blank form, but it entails asking the claimant to send back a renewal notice confirming that the details on which their claim is based remain the same while setting out any changes, in particular updates to income information. That deals with a point that has been made by several Opposition Members.

It is not a matter of receiving a form and continuing to get the credit. There is a requirement on the claimant to send back the renewal notice to confirm that the details on which the claim is based remain the same or to set out any changes. That information is used to check whether an adjustment is needed for the year that has just ended, and to set the award in place for the year that is starting.

Photo of Richard Younger-Ross Richard Younger-Ross Liberal Democrat, Teignbridge

Will the Minister explain the impression that a new claimant would have if they filled out a form one week and got a renewal notice one week later? That would be bureaucratic and unnecessary.

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

No, it is cause and effect. If one fills out a form and sends it off one would not expect nothing to happen. I imagine that a claimant would welcome something happening because they would have received benefit in the interim, the tax year would be nearing its end and a new year would be about to come. This is, after all, a tax-based system and claimants will do what we all have to do, which is to respond to that. If they provide the information that is required of them they will continue to receive the benefit, and that is how the system works. The hon. Gentleman believes that that would have a negative or detrimental impact, and we shall see whether his judgment is accurate.

The benefit of putting these matters to regulations to be laid before the House is that we shall be able to reflect on the impact of our approach on issues such as take-up, which means that we shall be able to judge whether this is burdensome or unduly complex. Our view is that it is not, and I hope that hon. Members are reassured that the claims process will be streamlined. I suspect that there is sceptic or two among the Liberal Democrat Members, which is fair enough. In the course of our deliberations I hope to challenge and address that scepticism, and to turn it into a recognition that we are seeking to find the best way forward. Of course, we shall listen to points that are made and bear them in mind when we formulate the regulations. I hope that the amendment will be withdrawn because it is unnecessary in achieving the objective that we all share.

Photo of James Clappison James Clappison Shadow Spokesperson (Treasury)

As the Minister said, this has been an important debate in which several helpful points have been made. Although he has eloquently put forward the balance that he seeks to achieve, I must say that there is a lingering sense of unease at the back of my mind because, as the hon. Member for Northavon put it, the Government may be in danger of overstating their case.

Understandably, the Minister wants to put his case forward, but it should be accompanied by an acknowledgement of the risks that may be involved. He referred to the submission that we recently received from the National Association of Citizens Advice Bureaux, and it will be worth putting its comments on record:

''The shift the change to 12 month awards which will alter in defined circumstances will represent should not be underestimated. There must be a risk that the loss of the certainty of a six month fixed award could weaken confidence in tax credits . . . NACAB is therefore a bit concerned that the rules proposed by the Tax Credits Bill will be more complex and less workable. If this is the case the system may be daunting, particularly to those who are moving into work for the first time.''

Those are important concerns that we would do well to bear in mind.

We should put those concerns alongside those expressed by the Institute for Fiscal Studies, which deals fairly with the balance that the Minister has set

out by acknowledging the benefits of greater responsiveness and a year-long system, but setting that against the risks implicit in such a system:

''The principle of within year responsiveness relies crucially on people volunteering information to the Inland Revenue within the year, and therefore introduces the risk of substantial (intentional or accidental) non-compliance.''

In an intervention on the hon. Member for Northavon, I put forward my concern about this matter. When we discuss the details we must be aware of introducing a greater risk of non-compliance that may lead to a greater risk of fraud. We should do our best to reduce the risk of exposing people to temptation. We must understand that this might tempt people not to declare changes in their circumstances that could have a profound effect on their income and standard of life.

We must also be aware that we are dealing with people who are not used to the tax system and filling in self-assessment forms, and who do not have famous firms of chartered accountants advising them.

Photo of Hugo Swire Hugo Swire Conservative, East Devon

Does my hon. Friend agree that insufficient distinction has been made between fraud and inadvertent fraud?

Photo of James Clappison James Clappison Shadow Spokesperson (Treasury)

My hon. Friend makes a valuable point. The risk in these circumstances, as has been proved with other forms of benefit, is that people become aware of a change to their circumstances and conceal that fact. When they take the decision to conceal the change in circumstances, they are moving from inadvertence into fraud because they are concealing a material fact. We want to avoid putting them in that position and exposing them to temptation.

The Minister and the Government will have to monitor how many families have a problem with this because there are significant changes and fluctuations in their income over the course of a year. This is the group that the Government must watch because, and again I quote the Institute for Fiscal Studies:

''Financial uncertainty and hassle will also be higher for this group of families. The success of the new credits will therefore partially depend on how many families experience these changes and on how good families are at estimating current-year income.''

I do not want to anticipate the next group of amendments because we are coming on to them with the next clause, but there is a warning for the Government. There is no room for complacency, the system is not entirely straightforward and we want to avoid the risk of making it more complex than it already is.

As the Minister has said, a balance must be struck. However, the Government initially chose the balance of the six-month system, and they are changing from a system that they chose so we must be aware of the risks.

Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions 6:00 pm, 15th January 2002

I shall briefly respond to the Minister's comments. On amendment No. 64, I accept his reassurance that we do not need to insert the words

''or is treated as being made''

if, once the process has occurred, references incorporate the date of the claim.

The Minister rightly discerned the scepticism of my hon. Friend the Member for Teignbridge. I can imagine the scene in all our surgeries. Someone who has claimed tax credits the week before the start of the financial year will say, ''I filled in all the forms, I gave them all my details and by return of post I received another form asking, 'Have your details changed?''' As I understand it, that is how it will work. That seems unnecessary. We were trying to be constructive in our amendments, and I hope that the Minister was hinting that there might be scope for looking at the matter again. If an amendment to the same effect were to find its way into the Bill in another place in this building, we would have no objections.

I turn to amendments Nos. 45 and 46, which seek reassessment after six months rather than a year. I was disappointed that the Minister hardly addressed the issues of in-year reassessment, whether people will understand how big a change must prompt a claim for reassessment and the suffering that they could face, possibly for 11 months, if they failed to make such a claim. I was disappointed, because those are fundamental issues.

Our debates have made it clear to me that the people for whom we seek quick reassessment are those on low incomes who correspond to the current working families tax credit group. If there was automatic roll-over for the income support people and some sort of quasi-automatic roll-over for those on higher incomes, whose tax credit entitlement is not affected by a big change in income because they are in the flat bits of the system, the only people who would need an extra reassessment involving some detail would be those on rather low incomes who could suffer if the wrong assessment were made and whose circumstances were likely to fluctuate.

In many ways, the debate has strengthened the case for our six-month proposal, and nothing that I have heard from the Minister reassures me that it is not necessary. I am still, even after four years, slightly hazy about the process, but if the opportunity to divide the Committee on amendment No. 45 arises, I wish to take it.

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

I shall respond first to the hon. Member for Hertsmere. I have had the pleasure of sitting opposite him, listening and responding to him in a number of incarnations—all of them welcome in my case, although I do not know about him—and I know that he lives in a state of perpetual unease. In some circumstances, that might be a healthy, albeit rather uncomfortable, state of affairs in which to find oneself. I do not mean to be complacent, but I believe that in this respect his unease is not justified.

Of course we must be vigilant; vigilance is certainly justified. We are making a major change, and I hope that I have acknowledged the scale of it. That is one reason why we are ensuring that NACAB, the Institute for Fiscal Studies and others who have expressed a view about these matters are involved as we prepare the regulations and draw up the detail of the system. It is right that they should be involved and also that we

should be able to reflect, as hon. Members have, our constituency experience. However, we must consider how the system proposed in the Bill builds on what already exists.

The hon. Member for Hertsmere said that in relation to the working families tax credit we initially chose the six-month period. We did, and we are moving on from that. We did not believe that that was the last word. This is a process of reform. The burden on claimants to report changes is a real one and is not to be sneezed at. The hon. Members for Teignbridge and for Northavon as well as some Conservative Members have referred to it.

We must remember, however, that the principle is not new. Both income support and JSA claimants need to respond, and are required to respond, to changes in their circumstances and to report those changes. However, this is new territory for tax credits, which encompass a wider population. It is therefore important to make sure—and we will make sure—that the responsive nature of the credit does not mean that we end up imposing excessive requirements to report changes.

We plan to consider the area carefully. We shall introduce detailed proposals in the form of draft regulations in due course, and there will be an opportunity to discuss them then. There will also be an opportunity for us to hear and incorporate the concerns of bodies like NACAB, which have day-to-day responsibility for providing advice and information to claimants. We shall need to address the risk of concealing changes, to which the hon. Member for Hertsmere referred, by monitoring those changes closely, as in income support or JSA, or by introducing fixed awards.

Our aim is to strike a balance between continuity and flexibility. It is a challenge, but we shall work out the details of the framework in a way that strikes the balance between preventing abuse and not deterring take-up—because that, too, is important. That point has been forcefully brought home to me and to my hon. Friend the Paymaster General by hon. Members of all parties who are concerned with poverty reduction—not least my hon. Friends—and I assure the Committee that we have it very much in mind.

With those assurances and having listened carefully to the contributions of those on the Liberal Democrat and Conservative Benches, I hope that hon. Members will not press their amendments.

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

This has been a useful debate. I hope that the Minister will not mind my saying that it illustrates the fact that the Revenue and the Treasury have perhaps not fully made up their minds how best to address such difficult territory. In essence, the Government seem to be striving for a system of negative income tax coding, in the same way as tax coding applies positively to income tax. The system is pretty seamless: it can roll from year to year and, where there is no material change in circumstances, it is relatively easy. Clearly, if people's circumstances materially improve, the risks to which my hon. Friends referred arise, and, as the Minister pointed out, if people's circumstances deteriorate, there is the danger

that people will not know how to apply in time to improve their tax credits.

The thought goes through my mind that, as the Treasury and the Revenue think further about the issue, they may even conclude that the only reliable way to address those matters is to present what I will call annual negative income tax returns and, as with income tax, permit clawbacks out of tax credits if there have been overpayments. Without such mechanisms, there will be problems.

We have addressed the issue in one way and our Liberal Democrat colleagues have raised it in another. The six-month arrangements for working tax credits have been subject to many of the problems on which the hon. Member for Northavon has commented.

The Bill is a framework. As I said in moving the amendments, it has been introduced almost too soon—before all the thinking has been done. The clause is all about regulations that may be introduced. Therefore, there is still flexibility for the brains of the Inland Revenue to decide exactly how they will deal with the problems. In that context, it is correct to withdraw amendment No. 15. However, we remain concerned that the framework that the Government are seeking to establish will give rise on one hand to a great deal of money not being clawed back where people's circumstances have improved, and on the other to people in need not getting the extra credits as quickly as they might require them. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment proposed, No. 45, in page 3, line 41, leave out 'whole' and insert 'first 6 months'.—[Mr. Webb.]

Question put, That the amendment be made:—

The Committee divided: Ayes 2, Noes 9.

Question accordingly negatived.

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

I beg to move amendment No. 16, in page 4, line 7, leave out subsection (4).

Many aspects of the amendment relate to matters that we have already discussed in some detail, and I will therefore be as brief as possible. Subsection (4) states:

''An award . . . does not end by virtue of any change''

affecting the rate at which it is paid. In other words, a change in someone's circumstances does not necessarily end the award. That arrangement could create problems over whether there are 12-monthly or six-monthly assessments. It may create unfairness in the de minimis entitlement of claimants and non-

claimants. A person who still has a tiny entitlement can go on receiving a larger award. A person who has just tipped over the edge and lost that tiny entitlement is supposed to report it and not get anything. People at the margins will feel a sense of unfairness over the positions of each.

Would it not be clearer and fairer for everybody if the system operated on the principle that if there is any change to one's circumstances, the award ends and one is required to re-file information? The arrangement is intended to reduce administration, but it could draw an unfair distinction between the two types of people whom I described. Moreover, it leaves an open door for moneys to go missing, which will be expensive and difficult to recover. That has been a problem with the six-month assessment arrangements for the working families tax credit.

Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions 6:15 pm, 15th January 2002

I wanted to say a few words in lieu of the Minister, but his return has denied me that opportunity.

The explanatory notes suggest that the thinking behind subsection (4), which the amendment would delete, is to allow for continuity when people move from one circumstance to another. The example given in the explanatory notes is positive—the birth of a child, which enhances the rate of entitlement. Continuity is a problem in the tax and benefit system. When one entitlement stops and another does not start it causes real problems. The subsection allows an award to continue while a recalculation is made. That is beneficial, and I would not want to remove it from the Bill.

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

I am grateful to the Member for Northavon for describing the purpose of subsection (4), which is much as he said. It enables the award of tax credits to be adjusted without requiring new claims to be made when a change occurs that affects the maximum amount of tax credit to which claimants are entitled, and without the entitlement stopping altogether.

Amendment No. 16 would prevent awards from having that degree of continuity and flexibility. The ability of the new credits to respond to changes during the period of the award is key to the improvements that we seek in the design of the new system. There is an important balance to be struck. The system must have the ability to reflect changes in entitlement as they occur, delivering additional support when it is warranted and reducing it when it is no longer appropriate.

Annual awards provide a stable framework for families to know clearly on what basis and for what period their award is made. Within that framework, the new credits will be able to react to changes in circumstances—one of which was outlined by the hon. Member for Northavon—and the rate of the tax credit payable can be adjusted when appropriate. It is important that adjustments can be put in place quickly and that the process is simple for claimants to understand. It would be onerous to require claimants to have their awards stop and then to make a new tax credit claim whenever their maximum

entitlement to a tax credit changed. Subsection (4) establishes flexibility within the tax year without interrupting the claim where entitlement continues but at a different rate.

I understand why the hon. Member for Arundel and South Downs tabled the amendment, but it represents a real disagreement between us on the proper way of approaching the issue. I am not sure that I will be able to square the circle for him or to satisfy him other than in the way that I have sought to do so far. There is not much that I can add to the points that I made in response to earlier amendments. The subsection is important, and to remove it would be damaging and deleterious to the Bill. I therefore urge the Committee to reject the amendment.

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

We are putting down a marker. If we are to have a type of what I call negative income tax PAYE coding to provide continuity—I understand the reasons for that—the Government must think of other ways to monitor it and to get it right. As I have said, negative income tax annual returns may be required to provide the information necessary for keeping up-to-date records.

The amendment represents the other, jagged approach, whereby an award must be reassessed whenever there is a change. Our point is that the continuity system has some significant problems to solve. Nevertheless, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 5 ordered to stand part of the Bill.