Clause 7 - Income test

Tax Credits Bill – in a Public Bill Committee at on 17 January 2002.

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Amendment proposed [15 January]: No. 65, in page 5, line 10, to leave out from the word 'means' to the end of line 23 and to insert the words

'current year income or previous year income as prescribed in regulations.'—[Mr. Webb.]

Question again proposed, That the amendment be made.

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury 9:30, 17 January 2002

I welcome you back to the Chair, Mr. Hood.

We were debating the amendment when the Committee rose on Tuesday. Its effect would be to reduce the flexibility that clause 7 provides for handling fluctuations in claimants' income. I understand the concerns of the hon. Member for Northavon (Mr. Webb) about simplicity, which we discussed during Tuesday's sitting and I hope that my explanation of how we intend the system to work under clause 7 will provide some reassurance.

The aim of the new tax credit is to combine continuity of support, where appropriate, with the flexibility to respond to changes in claimants' lives. In particular, it is important that tax credits should be able to intervene to provide extra support when claimants experience a significant fall in their income, thereby helping them to stay in work. The thrust of tax credits is to reaward work and to encourage and sustain it.

Although that flexibility is important, we are aware that people need as much certainty as possible about their tax credits. Clause 7(3) enables thresholds to be set for a change in income between one year and the next, so that only changes greater than the threshold will make any difference to entitlement.

Depending on what is set out in regulations, clause 7(3) will enable tax credits to be based on: current year income in all cases; current year income only if that is higher or lower, by a set amount, than last year's; current year income ignoring the first slice of a change by comparison with last year; or, in effect, previous year income.

Photo of James Clappison James Clappison Shadow Spokesperson (Treasury)

That sounds very straightforward.

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

I am glad that the hon. Gentleman thinks so.

The clause must create a context for the regulations that come later, which must have the capacity to meet all eventualities if they are to be fit for the purpose.

A tax credit system that responds to falls in income and provides extra support at the point of need must

be counterbalanced by the scope to adjust the amount of tax credits payable when people have had a significant rise in their income. That would entail setting thresholds under clause 7(3)(a) or 7(3)(a) and (b) together. If thresholds are set under both paragraphs, it is possible to allow people room for their income to rise by a certain amount without it affecting their tax credits for that year, so that their incentives to work and to increase their earnings are maintained.

The same sort of flexibility is available where people have falls in income. Thresholds can be set under clause 7(3)(c) and (d), so that people stay on previous year income unless they experience a significant fall in their income.

Because of the way in which clause 7(3) is structured, it would be possible to take a different approach to the treatment of falls and rises in income, and to respond to smaller falls in income than to rises. I see from the silent indication of assent from the hon. Member for Arundel and South Downs (Mr. Flight) that he understands and approves of that point.

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

I thank the Minister for his clear explanation. He says that last year's income may be used as the basis, provided that this year's income is only modestly different, but last year's income is income as defined under subsection (3), so it includes that distortion. No comparison is made with actual cash income; rather, last year's income is income as defined for the purposes of the clause. Might there not be a compounding of the variance from this year's income?

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

No. It will be reconciled at the end of the year, but I shall deal with that point, if I may, in due course.

As I said, because of the way in which clause 7(3) is structured, it is possible to take different approaches to the treatment of falls and rises, and it is designed to respond to smaller falls in income than to rises. Last year's consultation exercise revealed a consensus that tax credits should be able to be adjusted in this way. It also became clear, however, that interest groups and other respondents were concerned about how the provision would work in practice—a point that the hon. Member for Northavon is trying to tease out through his amendment.

One reason for providing flexibility through clause 7(3) is to allow further discussions before regulations are made. As I said, such discussions provide a context for the formulation of regulations that fit the purpose. My hon. Friend the Paymaster General has asked officials to take forward those discussions, and she is keeping in close contact with them.

I turn to the points that the hon. Gentlemen made when speaking to the amendment. It was asked why it is not possible to have a system based entirely on the income of the previous year. In one sense, that has a superficial attractiveness, in that it would offer certainty about the level of tax credits that people would get, subject to changes in circumstances that might affect their award. Our concern, however, is that there will be some who experience a drop in income in the current year, and if we use the previous year's

income such changes could not be picked up for 12 months. The attractive point about the system proposed in the clause is that will help us to get over that problem.

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

I do not think that a decision on whether one uses the previous year's income or an estimate of the current year's income second guesses the separate issue of whether there can be within-year reassessment in the light of dramatic changes. The amendment, which presupposes using the previous year's income unless there is a major change in circumstances, would also allow for within-year reassessment where such change occurs. Indeed, I listed some of the changes that might apply. I doubt whether there is a tie-in, therefore, with an inability to detect major changes for 12 months.

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

The jury is out on that one. The hon. Gentleman will recall that his earlier amendments would have established a period of six months. The issue was discussed in relation to clause 5, and there is no need to rerun that debate. I understand the approach, but we rejected it. Our view is that people who become entitled to income support or jobseeker's allowance would at that point move on to their full entitlement to child tax credit. We believe that we should go further than providing a basic safety net and have the scope to respond to falls in income while people continue in work. For example, someone might experience loss of regular overtime, which could have a significant impact on a family with a modest income. The framework provides us with the capacity to respond to that through regulations. Our fear is that without flexibility people will be forced to give up work to obtain extra support.

I assure the hon. Gentleman that clause 7 will enable thresholds to be set, which will result in virtually all claims being based on the previous year's income. I do not think that there will be a problem, but it is necessary for the clause to be framed as it is and the context to be set for the regulations to maintain that flexibility. One reason for taking such a flexible approach is to enable the system to be refined in the light of experience and we shall monitor it closely. I have no doubt that my hon. Friend the Paymaster General will address the issue in more detail when we consider the amendment tabled by my hon. Friend the Member for Regent's Park and Kensington, North (Ms Buck).

It may be helpful if I address the problem raised by the hon. Member for Arundel and South Downs and explain how the process will work. We intend claimants to start their awards on the basis of their previous year's income. That will generally be known. When thresholds have been set under clause 7(3), the Inland Revenue will advise people about the size of the change that should trigger a request for their award to be adjusted during the year. There will be a degree of certainty and people will be advised accordingly. At the end of the year, the amount of the tax benefit will be finalised when the actual income for the year just gone is known. There will be a reconciliation at the end of the year when the actual income becomes clear.

The aim of setting thresholds under clause 7(3) is to enable claimants to remain on the previous-year basis unless they experience a significant change in the current year. As some hon. Members have said, and as many of those who responded to the consultation exercise said, the level of the threshold is crucial. The hon. Member for Northavon tried to tease that out on Tuesday and he will not have much more success today because we need to do further work on that before a firm decision can be made.

The hon. Gentleman also referred on Tuesday to the effect of a threshold under clause 7(3) that disregards the first slice of a change in income. He wondered whether such a threshold should be carried forward to the next year so that the reduced amount of income taken into account in the current year should be also be taken as the previous year's income for the year just starting. A threshold that ignores the first slice of income change in a year only affects tax credit entitlement for that year. In the following year entitlement would again be governed by the difference between actual previous year income and actual current year income. Otherwise the effect would be to increase the chance of a move to current year income in the following year by magnifying the gap, a point that the hon. Member for Arundel and South Downs made on a number of occasions. The situation would become increasingly distorted over time. Our approach would enable a catching up with actual income at the start of each year, similar to the way in which working families tax credit picks up changes after six months.

I want to reassure the hon. Member for Northavon that the Inland Revenue is conscious of the need to provide guidance to claimants. We discussed this matter at some length on Tuesday. The content of that guidance and its clarity will be important, particularly in this part of the system, and there will be opportunities to contact claimants and offer them advice and support. As we have discussed, claimants will not be subject to requirements to notify changes in income during the year, although they will have to provide that information at year end. The Revenue will be able to check the information provided during the year or at the end of the year.

Photo of Mark Hoban Mark Hoban Conservative, Fareham 9:45, 17 January 2002

May I clarify the process in my own mind? The thresholds will not require people to notify changes in their income during the year, and at the end of the year there will be accounts. When the reconciliation is done, a claimant will be required either to repay excess tax credit received or to receive a top-up tax credit for the amount that he has not claimed. That is what I believe will happen in the year-end procedure.

I should have thought that a claimant whose income varied significantly during the course of the year—perhaps somebody in seasonal work—would be well advised to submit a reassessment of their tax credit during the year, so that they did not have to make a significant repayment at the end of the year.

Is there scope in the guidance to encourage claimants to submit regular reassessments of their

need for tax credits where their earnings are seasonal or uncertain as a result of moving in or out of work? I am perhaps more concerned with the seasonal point than with people moving in and out of work.

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

That would certainly be an issue for seasonal workers. In the discussion and the conveying of information between the Revenue and the claimant of the tax credit at the time of the application it would be advisable to point out, ''It may suit you to do this.'' There is no compulsion to follow that advice, but good sense would dictate that one should, in order to receive a steady, regular benefit as opposed to a hike at a time when it might not be so useful. The whole point, as we have said on a number of occasions, is to provide the income when it is needed. That is the advantage of the proposed system.

I know that this is not intended, but the amendment would make the system less flexible by restricting the scope of the regulations that could be made under clause 7(3), which I do not believe would be helpful. I hope that, in the light of my explanation, in which I have sought to address in some detail the points that have been made, hon. Members will not press the amendment to a vote.

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

Again I thank the Minister for a lucid explanation. I cannot help feeling that here we have an experienced counsel who has probably just about enabled all members of the Committee to understand how the provision will work. I think of myself sitting in a surgery trying to explain it to an average member of society and of the prospects of them understanding it. I am always uncomfortable with tax arrangements that people cannot understand, because if they cannot understand them, they may not know what they are entitled to, there is scope for error and so on. Although I appreciate why the clause has been so drafted and what it is designed to achieve, I warn the Government that proposing measures that ordinary people do not have a hope of understanding is an undesirable practice that invites trouble.

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

I am grateful to the Minister for putting on the record some matters that were not clear to me. He said that the majority—he may even have said the vast majority—of claims would be assessed on the basis of previous year's income. That is a significant statement, which offers some reassurance in respect of our concern about expecting people to forecast.

I should point out to members of the Committee that despite what the amendment paper says, my amendment is not about the funding of strategic health authorities and health authorities.

During Tuesday's proceedings I asked the Minister what happens when income changes exceed a particular threshold. That evening I found in my pigeonhole a written answer from the Paymaster General, which, he will be relieved to know, was consistent with the answer that he just gave.

I remain concerned about one aspect of the process. I shall give a simple numerical example. Let us say that a person's income is £100 one year, £130 the next, and the threshold is £20 a week. In these terms, that is a big change. The system will choose to ignore the £20, because that is the threshold, and assess only on the

basis of the £10, knocking off 35 per cent. or whatever the taper is. In that year, there will be a £3.50 or £4 adjustment. Suppose that in the following year the person's income does not change and stays at £130. His income has not changed between the two years but he will be assessed on a different income because in the second year the Treasury will again take account of the £20 width of the threshold, to stop the endless rolling over.

I know that there is a trade-off involved. However, I would find it difficult to explain to someone whose income had not changed between two years why their tax credit had fallen. One would have to say, ''That is because we disregarded it in the first year, but we have stopped disregarding it in the second year.'' That is quite a hard story to sell.

Photo of Mark Hoban Mark Hoban Conservative, Fareham

The hon. Gentleman raises an important point. I should have thought that if a person's income exceeds the threshold—£20, in his example of £100 and £130—the end-yearly assessment should be on the £30, not on the £10.

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

My understanding of clause 7(3) is that one of the paragraphs stipulates that the bit that will be taken account of in the assessment is only the excess over the threshold, not the whole increase. There is no easy answer to this. If one says that small amounts will be ignored—there is a lot to be said for that in terms of administrative convenience—one cannot then, as soon as someone goes a penny over the threshold, take the whole lot, because that will create a huge discontinuity.

If the thresholds are big—again, that is advantageous in terms of administrative convenience—the jump in the following year for someone whose income has not changed at all will be that much bigger, because the whole width of the threshold will be taken into account, and the bigger the threshold, the bigger the jump the following year.

The amendment is not as rigid as the Minister suggests. We are trying to get at the fact that the presumption is the previous year's income and the circumstances in which one can choose the current year's income, including within-year reassessment for big changes. There is no mention in the amendment of those disregard concepts. I do not want to rehash a previous debate, but another reason why a 12-month assessment might be problem is that in 12 months there could be bigger changes, bigger jumps and one must worry more about thresholds, which would have to be bigger. However, we have tortured the point as much as we dare and I am reassured by the Minister saying that the vast majority of people will be on the previous year's income.

My only other worry is that the tax mentality system has been applied. There may be overpayment or under payment recovery the following year—perhaps through adjustment to the tax credit—and those of us who are used to PAYE income, income tax returns and catching up on previous years are familiar with that system. However, it is different for the claimants that we are talking about. Because the amount could be so great, they may have two years' worth of underpayments or overpayments to recover

and have to take in account further adjustments. I worry that things will get fiendishly complicated.

The amendment was getting at the simple point that trade-offs must happen. I remain concerned about the complexity of the proposals as they will affect the claimant. However, at least if most people are on the previous year's income, that offers certainty for advisers and claimants. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Karen Buck Karen Buck Labour, Regent's Park and Kensington North

I beg to move amendment No. 86, in page 5, line 23, at end insert—

'(3A) The amounts prescribed under paragraphs (a) and (b) of subsection (3) above must not be less than £2,000.

(3B) The amount prescribed under paragraph (c) of subsection (3) above must not exceed £500.'.

Much of what we have discussed is germane to this amendment. Although I congratulate my hon. Friend the Minister on the clarity with which he explained the intention of clauses, I too found my ears gently seeping blood by the end of it. I do not encourage hon. Members to stray into naming a figure, but can we receive models, using a range of variations, of what the taper and threshold might be? We could then see examples of how the proposals might work in practice. I would then find it easier to understand and explain the implications of what is being said. I am sure that when we are in surgery and dealing with claimants the available briefing will include examples, but it would be helpful to the Committee, and on Report, to have such modelling now.

This is a probing amendment. We have already heard that Ministers will not be persuaded into naming a figure today and I am not expecting that. I am also conscious of the dangers of my amendment. There is a real risk that the more generous the amendment, the steeper the cliff edge when the calculation is made at the end of the year. I want to encourage Ministers in their representations to the Chancellor to be as generous as possible in securing a threshold. I also want to tease out a few more questions, some of which will be fiendishly technical and I am sure that I will not understand them. If we cannot have responses now, perhaps the Committee could be given written answers.

The argument for having a generous threshold is three-fold. It will reduce the level of overpayments. That is valuable because the experience that is coming through from Australia, about the level at which people face significant overpayments, is slightly concerning. We in this country do not have a culture, as the Americans do, which is used to significant year-end changes and calculations, which people build into their financial planning. We must be aware of that. The more that we can do to reduce the number of people facing those overpayments, the better.

The measure will reduce anxiety about overpayments. We mentioned earlier that many people, especially those who have been out of work

for a long time, do not have skills of projection and calculation. I hope that I am not being patronising, because I am not very good at them either. Those people might be discouraged from taking a little bit of overtime or extra work, or picking up another week or two seasonally, because of the difficulty of making a plan and their worry that there could be an unknown bill dropping on their mat at the year end.

The measure would also reduce the administrative burden, which is very important. The Revenue will be expected to take on a whole new level of work to deal with inquiries. I am confident that it will rise to that, but there should be the least possible burden on it.

In an earlier debate, the Minister made the important point that the whole tax credits policy, as well as its aim of welfare to work, is aimed at encouraging people to take greater responsibility for their own financial planning. That is absolutely right. I have no problem with it, and it is a healthy and good thing, but we are dealing with many people who are risk averse. That is one reason why many people have found it difficult to go into work in the first place. The more that we can find ways to help people to overcome that anxiety about taking risks, the better.

I wanted to include a generous threshold, and have set the figure at £2,000. That is slightly arbitrary, which is why this is very much a probing amendment. I welcome the fact that, as has been stated already, the thresholds will be asymmetric. That is very important, because there is no reason why we should not be more generous to people facing overpayments, and build in as tight as possible a safety net for people who face a drop in income.

I have a few specific questions. Can the Minister share a little more about how the threshold level will be determined when the figure is assessed? What calculations will underpin it, other than the pot of money available? Is it intended that the prescribed amounts in clause 7(3)(a) and (b) will always be the same? Given the specificity built into clause 7(3)(a), (b), (c) and (d), under what circumstances could clause 7(3)(e) apply?

If an amount were prescribed under clause 7(3)(d), tax credit entitlement would be based on a higher level of income than the claimant actually had. Obviously, lone parents, for example, are used to being on a low income, but the measure could cause severe problems. Do the Government intend to prescribe an amount under clause 7(3)(d)?

Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions 10:00, 17 January 2002

I do not have much to add. I first welcome the fact that the hon. Lady has tabled this amendment. I hope that it is the first of several from Government Members, who have a lot of expertise to bring to this issue, which we are lacking in our discussions. I know that that is convention, but I very much welcome the modest breach in convention that we have had this morning and I hope that we will see more of that.

As the hon. Lady says, this is clearly a probing amendment and we would not want specific figures in the Bill, not least because we want to index them.

However, it would be tremendously helpful to get an idea of whether we are even in the right ballpark. I welcome the fact that we are discussing asymmetric thresholds. People who could gain a little bit ought to be able to get that, when it would cost more for the state to recover that little bit.

I am unclear on one issue, and would like the Minister's clarification on it. How many year-end reconciliations will there have to be? I presume that it will be one for every claimant, which will be something like 6 million. I suppose that makes me slightly nervous about the administrative burden. My point refers back partly to the hon. Lady's question about how the thresholds will be set. Can the Paymaster General produce any evidence from Treasury analysis based on panel data on fluctuations in people's incomes from one year to the next and the number of people on various thresholds? She is already indicating that she can, so I shall not elaborate further. Certainly these variations are helpful.

To return to my earlier point, £2,000 is the threshold where, if the income goes up a bit, we ignore it for tax credit purposes. If the income remains the same, the following year the whole £2,000 is counted in the calculation. Assuming that the taper is 35 per cent. the claimant will suddenly lose £700, even though his income has not changed. For those trying to budget on a relatively modest income, that is a hefty sum. There is a trade-off here: a big threshold means administrative convenience, but it also means big jumps the following year after when it drops out of the calculation. I am interested in the Minister's reflections on how that trade-off will apply.

Photo of Mark Hoban Mark Hoban Conservative, Fareham

I have listened to the debate this morning and on Tuesday afternoon with growing concern about the complexity of the system of income assessment that we are putting in place. We have heard some clear explanations from the hon. Member for Northavon, who in a previous incarnation was a professor, and from a Minister who was a barrister—a distinguished barrister—and my own understanding of the Bill has been enormously enhanced by listening to their explanations.

However, I worry about how those who are being asked to advise claimants on the benefits will cope with the system. I think about my own surgery and about workers in citizens advice bureaux across the country. We are in danger of sucking claimants into a complex system if their income varies significantly from year to year, and we need more clarity. I welcome the suggestion of the hon. Member for Regent's Park and Kensington, North for some models, but I want to be sure that I understand the operation of the threshold.

When I intervened on the hon. Member for Northavon earlier, we agreed that the element above the threshold—in the hon. Gentleman's example it was £10 a week—would be assessed during the year. The change in tax credit would be implemented as a consequence of that £10 increase above the threshold—which in this case was assumed to be £20 a week. At the end of the year, when the reconciliation was done, would the calculation take into account the £20? In other words, if someone earns the £20

threshold, will they receive a reduction or will they be told to repay their tax credit to the extent of that £20? If over a year they received £1,000 extra compared with the previous year and the threshold was, say, £2,000, would that £1,000 be ignored at the year-end reconciliation or would they have to repay the tax credit that they had received, which they were not entitled to because they received that extra £1,000?

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

There are two issues here: there is the current year and there is another year hence. My understanding of the system is, as the hon. Gentleman says, that the £10 above the £20 would be tapered down within the year if necessary and also at the end of the year. Therefore, there would be no question of suddenly doing something different at the end of that year, but another year hence, if nothing has changed, the whole income will be assessed, as I understand it, and that is when the jump will take place. I am not talking about a jump occurring at the end of the year. If nothing changes, the disregard disappears a year later.

Photo of Mark Hoban Mark Hoban Conservative, Fareham

In a way I am more concerned about the first point, because the second already occurs: the working families tax credit claim exists for six months regardless of a change of circumstances and is then reassessed at the end of six months, and may change then, regardless of the fact that the income has not changed. However, I am concerned about the treatment of the disregard as part of the year-end reconciliation. Perhaps the Minister will explain—I am not sure which one will reply to this debate—in the concluding remarks how that disregard is treated as part of the year-end reconciliation and whether people will have to repay any excess that they have received as a result of the threshold operating during a year.

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

Good morning, Mr. Hood. As this morning's debate has shown, it is very important to ensure that the arrangements are correct. All members of the Committee will appreciate that it is important to set the figures in secondary legislation, so that we can return to the matter over the years. That is the quickest and most efficient way for Parliament to deal with the figures; indeed, that is how we deal with all rates and thresholds.

As my right hon. Friend the Financial Secretary explained in discussing the previous amendment, the clause seeks to provide maximum manoeuvrability in respect of the regulations. In drafting the provision, we have struggled with the question of what to say to constituents in our surgeries. Sometimes, simple matters that people understand clearly in terms of how to arrange their lives do not translate easily into legislation, but I should point out that it will not be necessary for claimants of the new tax credit, or their advisers, to read clause 7. We are trying to look sensibly at a series of principles and to strike a balance in legislation.

I should remind the Committee of the relevant arrangements. We want to move to a yearly assessment, so that we can offer certainty to those in receipt of the tax credit payment. Long-standing experience of family credit and the working families tax credit has shown that, although the six-month

renewal offers certainty during that period, it causes problems at the point of renewal, particularly in terms of families and household planning. A longer period is necessary to enable a move into the labour market, a change of job or the arranging of child care. Our aim is to establish certainty over a longer period.

We settled on using the previous year's income because we want to minimise the information that a claimant must submit by using information already in the tax system—the P60 and the P45—that can be suitably fine-tuned. No extra information need be collected at that point, because it will be flowing to the claimant. In respect of a claimant who is moving from benefit into work, all the relevant information will be in the system and easily obtainable.

We recognise the points made by my hon. Friend the Member for Regent's Park and Kensington, North and others, but what if something dramatic happens to the family income in the current year? In such a situation, it would be unreasonable not to move into current year, but doing so creates a problem, to which the hon. Member for Northavon has referred a number of times. Instead of knowing precisely how much they had earned and demonstrating that to us, they would have to assess their earnings for the rest of the year. We must show responsiveness, but we do not want them, or our officials, to be ensnared into having to decide every two weeks whether they want their new tax credit reassessed. There is a trade-off between certainty and responsiveness.

In keeping with the hon. Gentleman's suggestion, we looked at the income of families from year to year, which vary slightly, and the causes of the really dramatic changes that may result in a far greater or lower payment of tax credit. If somebody's tax credit is only going to pay them on reassessment another 70p a week, there will be administrative costs, and problems for them. We do not want to drag people into current year's assessment, and we do not want them to think that because their income has changed by a few quid a week they should automatically inform us. Although that approach works well for increases in income, in which case it is easier to set, it is more difficult to set for a fall.

As to what dramatically changes people's income, my hon. Friend the Member for Regent's Park and Kensington, North asked about the circumstances in which clause 7(3)(e) might operate. If a person became unemployed, which would be dramatic, they would move to current year assessment, they would fall back on to jobseeker's allowance or income support, and the system would kick in for child tax credit at the maximum amount. One point that is made about the working families tax credit is that it does not allow for flexibility because if a child joins a family, that will have a big impact. Other relevant examples include family break-up or incapacity through an accident at work. We can set those, but we must ask whether there are other circumstances in which income might change dramatically.

Let me return to the point about hon. Members in their surgeries. We will not have to explain clause 7(3)(a), (b), (c), (d) and (e) because the regulations would have settled the matter. People will be given advice, and, as my hon. Friend said, when they receive notification of their tax credit, it will be explained to them. As a caveat, we are working closely with all interested organisations and bodies which advise people such as citizens advice bureaux and the Child Poverty Action Group on the circumstances in which tax credits would be triggered.

That left us with the questions of whether there are any other circumstances in which income might change, and whether we should have the capacity to deal with them because it is a year's settlement. In the consultation, in which a vast array of organisations participated, the responses were balanced. Some said, ''Stick with previous year's income because it will iron out the following year when people are reassessed and at least they will know for 12 months.'' Others said, ''No. It is possible, although we cannot think of a scenario, and perhaps we should have that safety net.'' We are still having discussions because this is the insulation between the threshold and the tapers. We do not want to find at the end of the year that because people have been done in the current year's assessment, which they might have got wrong, they have been overpaid. Every member of the Committee can appreciate why we would want to avoid that.

Subsection (3)(a) to (e) allows every variation in rates and tapers to deliver what the Committee wants: certainty and a reasonable level of responsiveness that avoids the danger of people being paid too much. It is bad if they are underpaid, but at least they will receive a cash payment. If there is a huge overpayment, there will be difficulties and we do not want that. The arrangements allow us to make the final calculation.

A question then arises: if there are rises and falls, what do they need to be? We can be generous with a rise, because that will feed the work incentive and people will be better off for the yearthe hon. Member for Northavon is rightbut that will be included in the assessment when the next year comes. It will be a leg up for people in the year in which they make the transition. It will not be carried forward every year, but the Government are much more focused on ensuring that the fall is correctly balanced and that we do not bring people into the system for the sake of a few pence and do not leave them struggling when they should have had more credit. That is what we have provided, as my right hon. Friend the Financial Secretary said, in the arrangements under the clause.

I understand hon. Members' frustrations and that they would dearly love to know the thresholds and tapers, and some of the calculations. I am not in a position to provide the calculations for which my hon. Friend the Member for Regent's Park and Kensington, North and the hon. Member for Northavon have asked. We are extremely grateful for the continued advice and discussion to ensure that we address the point made by the hon. Gentleman about the experience of families and the rise and fall in their incomes.

I know that my hon. Friend accepts that the figures would not be in the Bill, but they are certainly interesting. I cannot tell her whether she is in the same game, ballpark or anything else without setting some hares running, but I hope that I have been able to explain how the system will work.

Subsection (3)(a) allows us to use current-year-only income. Subsection (3)(b) allows us to use current-year-only income if it is higher. Subsection (3)(c) allows us to use current-year-only income if it is lower. Subsection (3)(d) allows us to use previous-year income. Subsection (3)(e) covers an emergency situation and allows us to exit the system and go to automatic maximum support. I realise that the provision looks complex in the Bill, but Inland Revenue officials and the parliamentary draftsmen have done a brilliant job in putting such a hugely complex provision into the Bill so concisely.

The regulations will be available in draft for hon. Members to examine at some stage. I cannot say that that will be tomorrow or next week, but it will be before the Bill has completed all its stages. They will be subject to normal parliamentary scrutiny when we have heard the rates and tapers in the Budget.

I hope that I have dealt with the points raised and, because I do not have legal training, have explained in more basic language, such as I would use with my constituents, when a move to current-year-income should occur. I assure the Committee, as did my right hon. Friend the Financial Secretary when speaking to the previous amendment, that the advice, guidance, opportunities to discuss directly with an adviser in job centres and Inland Revenue advice centres, the work that we will do with the agencies that give advice, and the advice, support and information that we will give to Members of Parliament will clarify and simplify the provisions. I hope that that deals with the hon. Gentleman's point.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs 10:15, 17 January 2002

I thank the Minister for an even more lucid explanation. Perhaps she, too, should have been a barrister.

May I make a point that I tried to make on Tuesday afternoon, when she was not here? To help people understand, could we not use coding for negative income tax, as we do for positive income tax? Would not that make the issue clear? People would be coded according to their circumstances; the code might or might not change, depending on the margin of change. The code would be corrected at the end of the year, when updated information was available. Such an approach would be easier to understand, because people are already familiar with the mechanism and language through tax liabilities, as opposed to tax credits.

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

Although I understand the hon. Gentleman's point, my experience as a Minister and as an MP in my surgeries is that there is not a clear understanding of the tax code. It is always a challenge when people say, ''You're a Tax Minister, explain my tax code.'' The problem with the PAYE code is that many people interpret it as a value that they will receive. Instead, it is the rate of tax in a category.

That is particularly true of the groups that we are discussing. They are in the PAYE system—the self-employed would be able to decipher it—but a code would make the issue even more complex, because it would remove the statement that we will provide, which will show income and tax credits, and which will give information about notification of changes.

The Opposition have been attracted by the use of PAYE codes at different times; however, another advantage over PAYE codes is that tax credits will be clearly identified on the pay slip. The individual will receive a reconciliation of credits every pay period. If we were to show them as codes, how would people identify their tax credit, the change in the threshold or anything else? The Opposition's proposal would be more complicated than our approach. In a sense, we are using that method: people will apply, and we will provide a statement with everything clearly laid out so that they know where they stand.

The hon. Gentleman's final point was about end-of-year reconciliations. The P60, P45 and so on are used for the end of year reconciliation but are also needed for the following year. There is no additional burden; the tax credits are simply part of the process for the following year. The two are streamlined so that they are done at the same time: the first is closed off to determine the previous year's income, and that is moved forward into the calculations for the following year's tax credits.

The question of thresholds was raised by the hon. Member for Northavon. That happens now in the working families tax credit, and there are variations. There is no adjustment in WFTC, so people do not understand why incomes rising or dropping dramatically has no effect until they get the next renewal. In our view, it is more confusing to try to carry forward constantly artificial figures than to explain what is happening at that point. I have seen constituents who received WFTC not get it on renewal because shortly after they were first allocated it, their income increased beyond the threshold. Many felt that that was unfair and that we had taken it away from them, but there is no other way of working without doing what the hon. Gentleman wants to avoid and making the system horrendously complicated.

Photo of Mark Hoban Mark Hoban Conservative, Fareham 10:30, 17 January 2002

I want to return to the year-in reconciliation procedure, because it bugs me somewhat. If someone's income increased below the threshold so that the in-year tax relief payment remained unchanged, would there be a clawback of the overpayment at the end of the year?

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

If the rise were within the threshold, there would be no clawback. The increase would not be taken into the accounts, so the claimant would stay in the previous year's assessment. The reconciliation would see whether the claimant stayed in the previous year or came into the current year. If we set the threshold for a rise and the increase in income is within it, the increase is not taken into account at the reconciliation. The point made by the hon. Member for Northavon was that that would be seen as income in the next 12 months' assessment.

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

The Minister mentioned P60s. They do not become available until some point during the tax year, so will she clarify the timing? Will one know at the start of the tax year what one's tax credit will be for the whole of the year, before one receives a P60? How will that work?

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

It will work much as PAYE codes work. The coding runs on until new coding notices appear. We set the thresholds in the Budget, which is in March, and then the tax year starts and the next coding notice comes out. Pensioners have often made that point, and I know that the hon. Gentleman too has made it repeatedly. Credits will be running on a tax year, but we need the information that becomes available. The hon. Gentleman asked whether there would be a period when people do not get anything. There will not be a break; one credit runs into the other, and the system irons everything out year on year.

The hon. Gentleman will see when we get to later debates that it is conceivable that other income will need to be taken into account. I do not want to run forward into that discussion and what information needs to be supplied, which might be about modest savings that none the less produce an income. It will be much like self-assessment. Clause 23 details the arrangements, which are that the payment will continue into the new year to give time for the P60 to arrive and a new reconciliation to be made. The essential point is that there is no break in the award. Once people have started, they do not stop unless they come out.

Photo of Karen Buck Karen Buck Labour, Regent's Park and Kensington North

I am grateful to the Minister for that reply. Not only did it add greater clarity, but it was sympathetic in spirit to some of the concerns that have been raised by child poverty groups, who rightly see the issue at the heart of making the Bill work. There was a helpful exchange about the treatment of excess income below the threshold, which is something that people are anxious to understand.

There is concern about people's comprehension of the different clauses and their interaction. When it comes to surgery this is key stage 1 compared to the A-level that is housing benefit. We do not need to be too anxious. As the Minister said, there is an inevitable trade-off between simplicity and responsiveness. There is no getting around that without unlimited resources. In its spirit, the Government's action is right in trying to find that balance.

I appreciate reluctantly that we shall not have figures to chew on. I urge the Minister, when the modelling is done, to press for the maximum generosity that is consistent with avoiding the problem that we have identified, which is a cliff edge for people who exceed the threshold, particularly in the following year. The Minister did not respond to one or two specific questions which it may be possible to answer without straining for the figures: whether the amount described under clause 7(3)(a) and (b) will always be the same and whether the Government intend to describe an amount in clause 7(3)(d). I am happy for those questions to be answered in a note. I beg 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. 47, in page 5, line 26, leave out

', aggregate income of the persons'

and insert

'income of the higher earner'.

Photo of Jimmy Hood Jimmy Hood Chair, European Scrutiny Committee, Chair, European Scrutiny Committee

With this it will be convenient to take amendment No. 48, in page 5, line 32, leave out

', aggregate income of the persons'

and insert

'income of the higher earner'.

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

I can explain what I am driving at simply and briefly. We are integrating what is essentially a social security benefit, the working families tax credit—a renamed version of family credit—and an element of the tax system, the children's tax credit. Decisions have had to be made throughout as to where the workings of the tax system and the benefit system are different, and which way to jump. The Bill provides for decisions on unit of assessment. Most Government rhetoric says that this is about the tax system and is to be run by the Inland Revenue, but such an assessment is to be made on family or household income.

The amendments proposed have a blunderbuss effect in that if we went all the way on the terms of our amendments, not only would we be going for individual assessment for the rich—I should not use that word—for higher earners, but also for those on low incomes. I do not want to go all that way. The amendments seek to probe the Government's thinking about one particular group—I am sure that the Minister knows precisely where I am heading—which is the people who for the last two years, including the current one, have been able to receive children's tax credit. Those are couples who are both on a middling to higher income who receive a full children's tax credit under the present regime because it is individually assessed, but who under joint assessment might lose some or all of their CTC.

In order to obtain some realistic figures, I tabled a couple of questions a week or two ago. I asked what an average teacher and an average nurse earned and I was slightly startled by the answers. An average full-time qualified nurse working in the national health service and receiving all additional payments and allowances earns £450 per week. An average qualified teacher in the maintained school sector earns £550 per week. Add those two together, so a teacher married to a nurse—on typical average figures; I am not trying to rig the figures—will earn £1,000. An average teacher married to an average nurse has a gross weekly income of £1,000, or £52,000 per year. As I understand the way that the tapers on CTC work, under the present thresholds that would entirely exhaust their entitlement to CTC. If it does not I will want to know why not, because my family's joint income is precisely that and we do not get any CTC. I am not trying to declare an interest here. Nor do I suggest that I should receive it. Can the Minister offer any reassurance to families in that situation?

I have should have checked this, but I recall that about 900,000 might lose everything and 500,000 might lose something. Those are people who have lost the value of the married couple's tax allowance, have had a year with nothing, then got £520 of CTC for two years and may be about to get nothing again if the Bill goes through unamended. Not all of them are in dire poverty, but we should remember that we are talking about an amount per family, not per child. It might be the couple I described: the nurse married to the teacher who have several children and an income of £52,000 in total. By the time they have catered for the children their income might be much lower, on an equivalent basis, than that of a childless couple who earn a lot less. Yes, there will be rich people to whom we would not want to give the tax credit, but I am not sure that a nurse who is married to a teacher and has received it for two years should expect it to be taken away overnight in 2003. What plans does the Minister have to protect such couples?

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

The amendment simply asks the Government whether they are willing to confirm that nobody in receipt of CTC will be worse off when the new arrangements and amounts are introduced. We are well aware that that could happen, but it will depend on the levels that the Government intend to prescribe for benefit. The amendment would undo one of the improvements that we believe needs to be made. That is the obverse of the situation where a single earner whose spouse or partner is at home looking after several children is compared with two earners with older children. In each case the family depends on the one income or the combined income. At present many in the former category are disadvantaged against the latter category and the combined incomes are significantly larger than the single income. We welcome this as a probing amendment, but we would not support staying with the present arrangements.

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

This is interesting. The hon. Member for Northavon tables an amendment that he does not really want to speak to, because he recognises that it is not a very good amendment. The hon. Member for Arundel and South Downs agrees that it is not a good amendment and he does not want to speak to it. They decide to ask me a question that they have asked me often which takes us straight to the thresholds, tapers and decisions for the Budget.

The hon. Member for Northavon asked about a specific group who are currently in receipt of CTC. He has done this a number of times on the Floor of the House. He has probably asked me in writing. I give him the same answer, which is that the rates and thresholds in the full range of the new tax credits are a matter for my right hon. Friend the Chancellor of the Exchequer in his Budget statement. I look forward to being able to answer his question at the appropriate time, in the appropriate place, when the Chancellor has made his announcement.

I congratulate the hon. Gentleman on his ingenuity. To him I say, nice try. I ask him to withdraw this amendment, as he recognises that it is not a terribly good one. If he does not, I will ask my hon. Friends to oppose it. In the debates on all the clauses between now and the passing of this Bill, I look forward to

being amused by the many varied and ingenious ways that the hon. Gentleman will find to ask me the same question. I hope that I can rise to the challenge in finding many ingenious ways to give him the same answer.

Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions 10:45, 17 January 2002

I think the Minister is mistaken, if I may be so bold. She mistakes as an attempt to probe for specific rates and balances for future claimants—it is not that at all—what is an attempt to probe an issue of principle for existing claimants.

Hon. Members:

A very good response to a serious question.

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

That makes me nervous. Clearly, the Chancellor of the Exchequer will set the rates and balances that will apply to new claimants under the new system. That will have an impact on existing claimants—it must have an impact on existing claimants. Up, down or whichever way, it will have an impact. Naturally, I am not dreaming of suggesting that the Minister should tell us what that will be. There will be genuine concern. A million or more families in this situation stand to lose some or all of their £500 tax credit. It would have been helpful for the Minister to put on record an assurance that the Government understand and know that there are people in this situation, and that they would not want to create a windfall loss of £520 to a hardworking teacher and a nurse married to each other.

I am disappointed at the lack of assurance from the Minister, even on a matter of principle—without giving any figures—that the Government will seek to address transitional issues. There has not even been a hint of that, which disappoints me.

As I have indicated, this amendment is rather more sweeping than that specific point. Indeed, if the Minister encouraged her hon. Friends to oppose the amendment, I might do so myself. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

I beg to move amendment No. 17, in page 5, line 43, leave out subsection (8).

This is a probing amendment into two areas in particular. First, what is income? There have been various rules and practices built up over the years on the DSS side, as to what additional money earnings count as income and what does not. In another sense it partly involves the treatment of perks, but it is also goes into the difficult territory of voluntary firemen, the Territorial Army service and so forth. The Revenue has a different but related body of doctrine as to which perks count as income, and which do not. There are different practices also in relation to people in receipt of charitable help.

In principle, it seems to me that if we are moving to a negative income tax and arrangements under the control of the Inland Revenue, it would be logical for the treatments in these areas to be in accordance with Inland Revenue treatments. But it has been suggested to me that subsection (8) exists in part to enable the transfer over of a lot of the old holy grail of the DSS, in terms of what is and is not to be treated as income. I

ask the Minister for clarification as to policy here. I am not asking for the umpteenth detail in these tricky areas, but for the Government's intent.

I now come to the second area of what is or is not termed as income. Although I searched for it, I could not find this reference in the Bill, but the National Association of Citizens Advice Bureaux briefing expressed support for the fact that maintenance payments would not be treated as income. I presume that that means periodic or maintenance payments made by agreement or by court order.

My brother-in-law, with whom I discussed the subject, is a defence divorce lawyer. He said, ''It is outrageous. I am doing settlements for people in fairly wealthy situations getting more than £3,000 a month and they are all aggressively applying for and getting maximum income children's tax credit.'' That seems unreasonable. Why should the rest of the citizenry pay for maximum children's tax credit in a divorce when the settlement on the divorced spouse and children is comfortably sufficient for them to live on? Although I appreciate the argument that at more modest income levels the proposal saves much complication and that bringing up children by oneself is bad enough without such difficulties, at higher income levels, if the situation I have described is correct, CTC is unnecessary and unfair.

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

I am grateful to the hon. Gentleman for explaining what lies behind his amendment. I shall deal with its effect and then explain, in broad terms, as the hon. Gentleman, requested, our plans in respect of income.

The amendment would prevent income from being defined in secondary legislation, which I think was not what the hon. Gentleman intended. Such detail is better dealt with in secondary measures because it enables us to consider any changes that may be necessary without recourse to primary legislation.

We announced in response to our consultation on the new tax credits that child maintenance would not be taken into account for tax credit purposes; that also applies to working families tax credit. The hon. Gentleman mentioned his brother-in-law's huge success in a small number of cases, but for the vast majority of lone parents, who will be the major beneficiaries, the income that they are likely to receive is considerably smaller—perhaps tens of pounds. Recently published research shows that the presence of income disregard for maintenance payments to that group has been very successful in ensuring that they take up and stay in paid employment. We took the decision on child maintenance on that basis. I am a little surprised that people with such vast incomes bother with recourse to WFTC or CTC. I suppose it goes back to my scallywag point, regardless of gender.

By far the overwhelming number of beneficiaries of the proposal are on low incomes; it has exactly the effect that the Government intended. During the consultation, the 140 organisations were very clear indeed that in terms of work incentive, the continued disregard of maintenance was vital. We are firmly of

that view. I understand the hon. Gentleman's point, but I hope he will agree that the benefits to the vast majority outweigh that point.

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

Indeed, I made that point. Some divorce practices act for well-off people, but my brother-in-law's is not one of them. There is an argument for a simple cap, because CTC amounts are likely to increase in some circumstances under the new legislation. Depending on the number of children, people will be motivated to apply for £500 or £1,000 a year free of tax if they are so entitled, even though their maintenance payments from a wealthy ex-spouse could be substantial. Why not add a cap to prevent that?

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

To be honest, that returns us to the point that the hon. Gentleman made in previous debates. A cap would be an unnecessary complication for everyone claiming tax credits and in the legislation, in order to deal with a few exceptions. I would also hazard to suggest that an individual would have to be going some to spend £500,000 a year—that is a more lavish lifestyle than mine. Moreover, that income may be deposited somewhere, generating an income that would come into consideration, which leads me to his question of what the income tests would be.

The clause ensures against the anti-avoidance element in which people put income under the name of one of their children or a friend. We trace that money, which is a method used often in the tax system. The starting point is to bring tax credits in line with the tax rules. It would be right to depart from those rules for some types of income. During the current consultations, we are discussing exactly what they may be and whether it is necessary to exempt them. The income taken into account will be the annual taxable income from all sources, such as employment, self-employment, social security benefits, pensions, or other incomes: savings, trusts, overseas income and so on. Those rules come straight from the tax system, and we need to decide whether it would be right to include any other form of income. I hope that that explains the basic criteria. We are now deciding whether any other income should be identified. That would be implemented by regulations.

We will always make a judgment whether the income would be enough to merit its being drawn in, or whether that would complicate the system by dragging a large proportion of those claming tax credit into a burdensome submission of information.

At every point, we strike a balance and make a judgment. When that is finally made, I will be happy to go through it with the hon. Gentleman and to provide an explanation if the position is different from what I have said today. I appreciate that what regulations contain is a big issue for Committee members. I am trying to be as open as I can as well as to manage the final consultation to ensure that we get things right as much as possible. The Committee will receive the information as soon as possible.

I am sure that everyone appreciates that it is right to settle these matters in secondary legislation so that, once the tax credits are operational, we have the opportunity to learn from experience, to make

adjustments if necessary and to consider how people's income changes over time and whether other things need to be drawn in. On that basis, I hope that the hon. Gentleman will withdraw the amendment.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs 11:00, 17 January 2002

I had hoped that the Minister would give some guidelines on the first part of my inquiry in the latter part of her response. I am talking about simple principles. First, if people are in receipt of charitable help that is definable, will that be treated as income? Secondly, will perks that relate to employment—whatever they may be—be treated in line with Revenue practice? Thirdly, are the Government willing to tidy up some of the hangovers from the past in relation to social security law in this area in line with Revenue practice?

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

The hon. Gentleman has touched on precisely the points that I cannot answer now, although they are pertinent and I hear what he says. Benefits in kind, for instance, are very varied. Do we need to sweep them all across for the purposes of tax credits or will there be variation? That is one question. The hon. Gentleman's point about charitable payments is also important. There are quite a lot of complaints about the tax system. Indeed, the hon. Gentleman makes quite a lot of them. I am considering what is necessary and what materially changes the value of the tax credit paid, which I appreciate goes back to rates and tapers. I am also trying to balance the equity argument with the simplicity versus complexity argument.

I do not recollect the point about charitable payments being made before now, but I am more than happy to consider it. I hope that the hon. Gentleman accepts my assurance that, exactly as he implored me, I want to keep the system as simple and fair as possible without allowing any unreasonable levels of income to escape consideration and cause a schism between tax credits and the tax system as a whole.

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

I thank the Minister for those comments. I want to return to one issue, because I think that she slightly misrepresented in terms of numbers the type of situation that I described. We are talking, of course, about a minority, but in settlements involving families—I am thinking particularly of London—maintenance agreements, by agreement with the court, of the order of £3,000 per month are not that rare. That is certainly not the average, but if the Minister considers remuneration levels in central London, she will understand my point. I am talking not about the tiny minority at the super-rich end of the scale, but about an affluent minority that is not tiny. My point applied in that context. I understand the argument that we should not clutter this up when we are trying to keep matters as uncluttered as possible. People other than myself are likely to find it objectionable if they know that people generously provided for in maintenance payments—of whatever sex, these days—were then able to secure £1,000 or more tax-free child tax credit.

The amendment is a probing one, which we shall not press to the vote. I am happy with part of the

Minister's response, although not all of it. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 7 ordered to stand part of the Bill.