Clause 6 - Notifications of changes of circumstances

Tax Credits Bill – in a Public Bill Committee at 6:15 pm on 15 January 2002.

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Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs 6:15, 15 January 2002

I beg to move amendment No. 77, in page 4, line 30, after 'given', insert

'within a period of 28 days'.

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

With this it will be convenient to take amendment No. 83, in page 4, line 37, at end insert

'being not less than three months'.

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

Clause 6 claims to set out the arrangements for notifying the board of changes in circumstances that affect tax credit entitlement. It is not entirely clear, however, whether the provision of such information will be wholly the job of the individual, or whether there will be any onus on the employer—an issue that I raised on Second Reading. Under the clause as drafted, it appears that the employer may indeed be required to provide such information. The amendment is necessary because the framework remains rather woolly. There is no apparent time limit on the provision of such information. Under our amendment, regulations could require that the board be notified

''within a period of 28 days''

when a claim ends.

The Liberal Democrat amendment, which would require that notice be given within three months, is similar. Doubtless the Government will propose a notice period of their own, with which we may all

agree. In any event, it is clear that a sensible notice period is needed.

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

I speak in support of amendment No. 83. The time scale for notification of a change of circumstance will be set out in regulations, but if the amendment were accepted, regulations would have to specify a notice period of

''not less than three months''.

It is perhaps worth pointing out my concern—shared, I suspect, by both Opposition parties—that the debate is being conducted in the absence of any draft regulations. I tabled a question, asking that we see such regulations before or during our deliberations; indeed, to see them at any point would be nice. It is tempting to say that regulations are about detail and the Bill is about principle, so we do not need to see them, but the line between detail and principle is slightly fuzzy. If the implications of certain regulations prove particularly extreme, the entire principle that we are debating will be undermined. I register my concern, therefore, about the lack of even draft regulations. Failure to provide draft regulations is not universal. In fact, draft regulations were available to the Committee that debated the previous Tax Credits Bill. I therefore hope that the Minister can offer a time scale in that regard.

Amendment No. 83 would, to a limited extent, circumscribe what the regulations may say, given that we have yet to see them. We are trying not to write the regulations into the Bill, but simply to establish the parameters in which they operate.

One example of a change in circumstance—the ending or starting of a relationship—would be reportable in all cases. The issue has been drawn to our attention by the Low Income Tax Reform Group, which, like the National Association of Citizens Advice Bureaux, has first-hand experience of the client group in question. The group states that, where two people's

''relationship ends in tragic circumstances . . . their first reaction is unlikely to be—Ah! We must inform the Inland Revenue straight away because section 5(3) of the Tax Credits Act''

requires that we do so. It is clear that they must inform the Inland Revenue at some point, but we should bear it in mind that, just because one partner has walked out, it is not certain that the relationship is definitely over. It may not become apparent for some weeks or months that that is final. That is just one example of how the establishment in regulations of a short notice period would be rather unfair on that client group.

Obviously, there is a balance to be struck, and we must also consider administrative convenience and the interests of the taxpayer. A period of three months does indeed strike the right balance—a view that is shared by the Low Income Tax Reform Group. As it modestly says, its representatives are

''those who habitually advise potential tax credit claimants'',

and who are very familiar with the circumstances that we are discussing.

As I have said, we are not trying to write the regulations into the Bill. Instead, the purpose of our

amendment, given that we have yet to see the regulations, is to establish some parameters.

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

Opposition Members have made their points fairly and succinctly, and they contain a great deal of force. I say immediately to the hon. Member for Arundel and South Downs that there will be no onus on employers to report changes in claimants' circumstances, and I hope that he feels reassured by that. I see no obvious manifestation of unease—[Laughter.] Perhaps I should not tempt fate.

The hon. Member for Northavon has tabled a question for the Paymaster General, to which she will doubtless reply shortly. I do not doubt that she will want the draft regulations to be completed as soon as possible, that her general approach to such matters is to consult and to involve people, and to share as much information as possible, so that we can get matters right. Indeed, that is what we are here to do. None the less, I hear what the hon. Gentleman says, and I will ensure that, so far as is possible, his comments are taken into account in timetabling these matters.

There is probably a measure of agreement among all hon. Members on the substance of the amendments. As we have said, the new tax credits are designed to respond to the changing needs of claimants. It is important that awards be able to adjust to changes as they occur. If awards are to adjust to changes in circumstances during the year, it will of course be necessary for claimants to tell the Inland Revenue about those changes as they occur. The clause deals with that notification process. Broadly speaking, it is equivalent to notifications under clause 4. As with deciding how long a period to allow for claims, deciding how long a period to allow for notification involves striking a balance. The provision must be flexible and recognise the practicalities of people's lives.

We accept that changes that may affect entitlement could occur when people are particularly busy and tax credits are not at the forefront of their minds. The example of the circumstances surrounding the birth of a baby has already been given. Similarly, as the hon. Member for Northavon said, when a relationship collapses, people do not think clearly about the consequences. It does not necessarily become immediately apparent that the change is permanent. Often, one or both parties harbour unrealistic expectations that are not met.

We need to have flexibility and a recognition of real life. At the same time, people need to be encouraged to report changes as soon as practicable so that they receive appropriate support. Allowing people three months to notify changes is the right balance. We have alighted upon that figure because we believe that it gives claimants a reasonable time to identify that the change may affect their award, and to submit notification. Opposition Members may disagree among themselves. Some may prefer 28 days, some may agree with three months, but the consensus will probably be around three months.

Amendment No. 83 would write that into the Bill. Although I happen to agree that three months is appropriate, the amendment would not be the correct way in which to proceed. It should not be written into the Bill and would be better dealt with in regulations.

Amendment No. 77 is evidence, if it were needed, that it is possible to reach a different view. That is all the more reason for matters to be dealt with in regulation. I do not share the view that 28 days is appropriate, although I understand the reason for the amendment. We want to monitor closely how the system works in practice to see whether three months strikes the right mark. It would be unwise to limit our ability to learn from that experience by including in the Bill a deadline as specific as the amendments urge. I hope that that argument will be accepted by Opposition Members, whether they favour 28 days or three months. We will carefully look at the practical impact of the regulations, just as we will reflect on their content. I hope that hon. Members will not press their amendments.

I cannot stress sufficiently the importance of developing a culture in which people are encouraged to report changes, rather than one in which they have an interest in not reporting them. We must get them to see the system as an aid rather than a hindrance. The efforts of the Government, the Inland Revenue and those with whom it works to make advice and information available to those claiming the credit will be focused on that end.

Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions 6:30, 15 January 2002

I am greatly heartened that the Minister is plumping more for three months than 28 days. I will cut my losses and not press the amendment.

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

We are content with the three-month notice proposal and I thank the Minister for making it clear that that is the Government's intention. As people get used to tax credits, it is likely that prompt notice will be given if circumstances worsen; if they improve, it is likely that people will take the maximum three-month period. Again, that raises issues of ease of recovery. However, we have an acceptable minimum and on that basis I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

I beg to move amendment No. 61, in page 4, line 34, at end insert—

''; the prescribed description shall include reference to a threshold below which changes in income do not have to be notified.''.

We are still on clause 6, looking at the regulations concerning notification of changes of circumstances. We are concerned through the amendment to ensure that the regulations, which we have not yet seen, will include a minimum threshold beyond which changes that would reduce someone's entitlement do not have to be reported. There will be further discussion on those thresholds and their size, but we do not want someone who has a marginal change in circumstance to accrue an overpayment or, worse still, be accused of fraud. There could be something in the regulations about that. NACAB bravely put a figure on it and suggested that £500 a year might be a relevant change. Thus if someone received up to about £10 a week more in tax credit than their current circumstance implied,

when under their previous circumstance that was not the case, notification or failure to notify would not make any difference to their entitlement.

Obviously, as with all such things, there is a balance to be struck. The bigger the threshold, the more taxpayers' money will go to people who are technically not entitled. On the other hand, if the threshold is very small, many people will need to tell the Inland Revenue about trivial changes, which will have an administrative cost.

It is worth reflecting for a moment on the fact that quite a lot of changes could affect the amount of tax credit to which one is entitled, especially in the lower income ranges. All manner of changes in child care arrangements, working hours, overtime and family circumstances could affect entitlement to working tax credit, its child care element and child tax credit. We do not want the Inland Revenue constantly to be bombarded by 6 million people telling it all about the fine details of their lives. That is not the world that we want to go towards.

The amendment relates specifically to fluctuations in income. The group currently in receipt of working families tax credit are the sort of folk who may do an extra shift or a bit of overtime, and it may be different from one week to the next. There may well need to be some averaging provisions, and there should certainly be a de minimis threshold, which is what the amendment proposes. I would be grateful, in probing the matter, for an assurance that that is the Government's thinking and that there will be such a threshold, and for an early suggestion of the level of threshold that they are thinking about.

Mr. Boateng indicated dissent.

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

The Minister helpfully shakes his head, indicating that he will not tell me a threshold.

To return to my earlier point, the line between detail and principle is rather grey here. If the Government end up with a tiny threshold, we will be very unhappy with the system, but nor should they come up with a socking great one. There is a balance to be struck. Some sort of ball-park estimate—I am not sure if that is a parliamentary phrase, but it is what we are after—would be very helpful.

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

In this territory, as in others, there is a trade-off. In order to reduce administrative requirements on individuals and the Revenue, we could end up, as is the case with longer periods of notice, with more and more tax credits potentially being paid at a greater level than people are strictly entitled to. That, of course, will be paid for by other people's taxes. There must be a balance. The more one goes down that route, the more it highlights the need for an easy mechanism to claw back overpayments, to which I previously referred. One cannot have it both ways. Either there must be a system requiring annual reporting that can claw back overpayments, or the rules must stay pretty tight.

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

I am afraid that I shall disappoint the hon. Member for Northavon. After the dawn comes the deep, deep dusk, and not a hint or shaft of light shall I cast on the issue of thresholds. There will be no

ball-park figure revealed by anything that I say. Those matters are entirely for the Chancellor. In due course, the gloom will be dispelled and all will be revealed, but I shall not be doing it.

I shall address the principle that underlies the hon. Gentleman's contribution. I am interested in the line that the hon. Member for Arundel and South Downs is taking, and I can see exactly where he is coming from. Time will tell, but we believe that the system that we have unveiled will be able to deliver without the modifications that have been suggested. It is a matter of judgment and experience, and it will be interesting to see what emerges, but I am confident in the system that we propose.

One reading of the amendment suggests an apparent misunderstanding of clause 6 and a misreading of its purpose. Clause 6 is concerned with changes in non-financial circumstances: for example, when a family becomes responsible for a new child. It does not touch at all on how the credits will respond to changes in income from one year to the next. I understand what the hon. Member for Northavon is getting at in his amendment, but he will appreciate that, as drafted, it concerns the regulations setting out changes that decrease the rate of entitlement, which have to be notified by a claimant to the Inland Revenue during the year.

The amendment seeks to introduce the proviso that the regulations must include

''a threshold below which changes in income do not have to be notified.''

That is not necessary, because the power to make regulations about the changes that must be notified does not extend to regulations about notifying changes in income. Income is dealt with in clause 7 and I shall not anticipate our consideration of that clause, except to point out that subsections (4) and (5) of the clause make it clear that awards will be based on income for a tax year. It would be unreasonable to impose on claimants a formal requirement to notify changes in their annual income during the course of a year because annual income cannot easily be determined until after the end of the year.

Photo of Mark Hoban Mark Hoban Conservative, Fareham

The Minister has raised a point that concerned several hon. Members on Second Reading. He says that someone's current year income cannot be known; they have to estimate it. Much concern was expressed on Second Reading that people who are claiming a tax credit will have to estimate their current year income and the likely number of hours that they work in a year. Are fears that people will have to estimate those two factors unfounded?

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

I do not think that the fears expressed in that regard on Second Reading bear too close an examination. We will come to clause 7 in due course, but the whole point of subsections (4) and (5) is to make it clear that awards will be based on income for a tax year. It is not a question of imposing on claimants a formal requirement to notify changes of income during the course of the year or to determine in advance what their income will be. The requirement is to notify the Revenue at the end of the year of any

changes that occurred during the year and that make the information supplied inaccurate.

A change could involve hours, employment or the household, but claimants are not required to estimate during the tax year what their income will be for the whole of that year. At the outset, awards will be based on the previous year's income and, depending on decisions still to be made on how to respond to changes in income, claimants may have their awards adjusted during the year based on an estimate of the current year's income. That will be determined in the light of decisions that have yet to be made.

The concerns that were expressed on Second Reading are not justified. Even if thresholds were set in regulations under clause 7(3)(a) to (d), there would still be no formal requirement to report changes in income to the Revenue during the year. In debates on previous amendments, I said that our aim was to develop a culture in which people asked for reassessment and reported changes if their income had risen. That is sensible because it will reduce the risk of overpayment. Similarly, when people believe that changed circumstances might justify an increase in the amount that they receive, we want them to be in a frame of mind in which they see that as something to help them. We shall actively discourage people from notifying small changes of income during the year to minimise the scope for overpayments.

We do not propose to introduce penalties for submitting an estimate of income during the year that turns out to be incorrect. I do not want to trespass on your patience, Mr. O'Hara, by going into clause 7 in detail, but the corollary is that clause 7(9) gives the Inland Revenue discretion to decide whether to adjust payments during the year to reflect a claimant's estimate of their income. That will provide protection against abuse by claimants who wilfully submit unreasonable estimates to obtain extra tax credit. The threat of penalties may deter claimants more generally from asking for reassessment during the year.

We want to encourage people to change their attitude. We are moving towards an integrated tax and benefits system and that will involve consumer education. It will require close working relationships with benefits advisers, NACAB and others to smooth the transition—the Revenue is geared towards this—but we believe that the gains at the end of the process justify the proposed actions.

Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions 6:45, 15 January 2002

That was a helpful response, because it cleared up some of my misunderstandings about the way in which the system will work, although I am not sure that it was a reassuring response. In the system that the Minister is describing, changes to circumstances covered by the clause must be notified immediately or within three months, or whatever it turns out to be. Therefore, a change in a relationship or the birth of a child must be notified within three months. Changes in income do not have to be, but there will be a year-end reconciliation, if I understand

it correctly, although claimants will be at liberty to report such changes. However, the Minister used the phrase ''small changes'', which was the starting point for the amendment, although I accept that it was in the wrong place. He is almost agreeing that there needs to be some concept of small changes for the system to work.

To avoid pursuing the matter for too long, I accept the Minister's point that the amendment is to a clause that deals with changes in personal circumstances and not changes in income, and therefore does not work here. However, his description of year-end reconciliations concerns me a great deal, particularly when we are talking not simply about the few poor but about 6 million child tax credit recipients, many of whom have never made a tax return and who, as far as I can see, will now all have year-end reconciliations. I suspect that we shall return to that on the next clause, but I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 6 ordered to stand part of the Bill.