Clause 29 - Incorrect statements etc.

Tax Credits Bill – in a Public Bill Committee at 5:45 pm on 22 January 2002.

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Photo of James Clappison James Clappison Shadow Spokesperson (Treasury) 5:45, 22 January 2002

I beg to move amendment No. 24, in page 19, line 38, leave out ''fraudulently or''.

Photo of Mr Nigel Beard Mr Nigel Beard Labour, Bexleyheath and Crayford

With this it will be convenient to take amendment No. 114, in page 20, line 14, leave out ''fraudulently or''.

New clause 10—Fraudulent incorrect statements—

''(1) If a person fraudulently—

(a) makes an incorrect statement or declaration in or in connection with a claim for a tax credit or a notification of a change of circumstances given in accordance with regulations under section 6 or in response to a notice under section 17, or

(b) gives incorrect information or evidence in response to a requirement imposed on him by virtue of section 14(2), 15(2), 16(3) or 18(2) or regulations under section 24 he shall be guilty of an offence.

(2) A person guilty of an offence under subsection (1) above shall be liable on summary conviction to a fine not exceeding level 5 on the standard scale, or to imprisonment for a term not exceeding 6 months, or to both.''

Photo of James Clappison James Clappison Shadow Spokesperson (Treasury)

We now move from overpayments to the penalty regime, which is constructed between clauses 29 and 33. Clause 29 provides for penalties for persons who make incorrect statements in applications for tax credits. A person who fraudulently or negligently makes incorrect statements or declarations may be subject to a penalty of up to £3,000. In many respects, that mirrors provisions already in place in the Tax Credits Act 1999.

The purpose of the amendments and new clause 10 is to separate fraudulent statements from negligent statements and make fraudulent statements subject to a more serious regime. We had a short debate about negligence earlier. I do not think that there is an important difference between—

Photo of Mr Nigel Beard Mr Nigel Beard Labour, Bexleyheath and Crayford

Order. I beg the Committee's pardon. I omitted to put the clause stand part question for clause 28.

Question proposed, That clause 28 stand part of the Bill.

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

I wonder if I might take this opportunity to put a point on the record about interest on overpayments. It is of interest to those who observe our proceedings and to those who subsequently read the record. My comment has a direct bearing on the debate on clause 29, and I would

have made it then, Mr. Beard, if you had not given me an opportunity to do so now.

It would be our intention to seek interest only if the overpayment arose because of fraud or neglect. The hon. Member for Northavon would have pressed the matter to a vote even if I had mentioned that earlier. I could see him working himself up to pushing for a vote. However, it is important that the record should be clear: people who receive overpayments in the circumstances that we described and receive notice of overpayment due after the 30-day period will not have to pay interest if they do not pay immediately or if they pay over a period of time.

Question put and agreed to.

Clause 28 ordered to stand part of the Bill.

Photo of James Clappison James Clappison Shadow Spokesperson (Treasury)

The image still in my mind is that of television. We have now had a demonstration of video equipment from the Minister, who has given a proficient demonstration of playback. I will not freeze frame but will endeavour to fast forward—back to the future—to clause 29, which is about fraud and negligence. We believe that fraudulent statements are more serious than negligent statements and should be dealt with accordingly; that is the purpose of new clause 10.

Amendment No. 69 probes the Bill's implications for negligent statements under the new tax credit arrangements. However, we wish to make fraudulent statements a criminal offence and ensure that they are dealt with as such under clause 29. In order to assist deliberation on the subject, we would like to know how many of the 478 penalties that were imposed for false working families tax credit applications since the system began in October 1999 were for fraudulent statements and how many were for negligent statements. We would like to have clear information about the operation of the penalty regime.

The Paymaster General recently told me in correspondence that the Inland Revenue was not recording information about how much was recovered through tax credit penalties. Until 26 October last year, penalties received as a result of tax credit investigation settlements and tax credit penalties were recorded as income tax. Only since 29 October last year have tax credit investigation settlements and tax credit penalties been recorded separately from income tax. The Paymaster General told me that, in the first two months of recording tax credit receipts separately—as penalties and settlements—the Inland Revenue collected £191,000 in settlements and £50 in penalties. We would like to have clearer information about that, and greater transparency in the system. We detest fraud, and no doubt that view is shared by all members of the Committee. As a criminal matter, fraud should be taken seriously, and we want to see it dealt with as a criminal offence.

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury 6:00, 22 January 2002

Through the amendments, he hon. Member for Hertsmere wants to remove from clause 29 the reference to fraudulent behaviour. He would prefer that such behaviour were dealt with as a new

criminal offence under his proposed new clause. I agree with the hon. Gentleman—as I am sure do all members of the Committee—that we want to ensure that the compliance framework for the new tax credit is effective against those who may attempt to abuse the system. Fraud is undoubtedly such an abuse and it is our objective to prevent it, while not deterring people who are genuine from claiming their entitlement.

I want to explain how we propose to take such action. In the light of our intentions, the hon. Gentleman's proposed new clause 10 is redundant. Nothing would be caught under it that would not already be caught under the new criminal offence introduced under clause 33. The Bill already makes clear provision to counter criminal abuse of the system, and the criminal offence that the hon. Gentleman wants to introduce would not add anything to that.

We are always open to suggestions about how the law may be made more effective and, as the hon. Gentleman knows from previous exchanges with me in Committee, we are open always to suggestions on how to improve the focus of criminal justice measures, particularly as they relate to fraud of the public purse. We do not believe that new clause 10 would achieve anything that is not already achieved under clause 33. If he has a contrary view, can he establish any defect or failing under clause 33? I am not sure whether it is his intention that civil penalties should not be available in cases of fraudulent behaviour. If so, amendment No. 24—and amendment No. 69, which we shall discuss when we reach the next group of amendments—would remove ''fraudulently'' and ''negligently'' from the clause. That would mean that we do not have a civil penalty either, but clearly that is not his intention.

Photo of James Clappison James Clappison Shadow Spokesperson (Treasury)

In the first part of my remarks, I said that amendment No. 69 was a probing amendment.

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

I am grateful to the hon. Gentleman. Were that not the case, penalty provisions would be available whenever someone made an incorrect statement or provided inaccurate information, including cases of fraudulent behaviour. That would not be desirable. It would even make the penalty available where there was neither fraud nor neglect. It clearly would not be right to punish an innocent error in that way.

Perhaps we should look at cases where there has been an innocent error. The hon. Member for Northavon has expressed concerns about that in the past. The Government's policy for tax credits, as for tax matters more widely, is that civil penalties should be applied in most cases of fraud but that there should be criminal prosecutions in cases of serious or organised fraud. Governments of all political persuasions have adopted that approach. It is cost effective and experience tells us that prosecutions for minor frauds do not generally result in sentences likely to provide a realistic deterrent.

We want to ensure that we develop a legal framework that is effective, but proportionate in its response, and that gives us a compliance regime that is fit for the purpose. We think that we have got the

balance right. I do not think that the improvements suggested by the hon. Member for Hertsmere would turn out to be improvements at all. They are either unnecessary or technically flawed. However, we accept the spirit that underlies them, which is to bear down hard on fraud and to make it clear that fraud is unacceptable and will result in a proportionate response.

Photo of James Clappison James Clappison Shadow Spokesperson (Treasury)

I am grateful for the spirit in which the Minister responded. I will endeavour to answer his main point, but there is another important point that I should make first. The amendment is designed to deal with fraud and is not intended to deter people from claiming the credits to which they are entitled, or to deal with people who receive an overpayment through no fault of their own or who, through their own failing or carelessness, but not dishonestly or fraudulently, receive too much working families tax credit. It is designed to get at people who deliberately set out to defraud the system by making deceitful representations. There is a big difference between those who form a dishonest intention to deceive the system and the honest person who perhaps loses out as a result of the dishonest activities of the fraudsters.

The Minister asked me why the provisions in clause 33 are not sufficient and why we want to have this additional new clause. Clause 33 could be improved. We would like to see a stiffer penalty. Even were that not the case, it is possible under the existing provisions of tax credit to prosecute people for false WFTC applications. That has been done. I would draw more confidence from the Minister's response if the prosecution policy had been more vigorous. So far, the number of prosecutions has been very low indeed. No one can reasonably say that the extent of fraud in tax credits is reflected by the number of prosecutions. It is more likely that fraud is going unprosecuted. Either it is not being detected or, when it is detected, it is being dealt with by penalties rather than prosecutions. The new clause would mean that if someone acted fraudulently or made a fraudulent statement, they would be prosecuted for a criminal offence.

I have listened carefully to the Minister's comments. I want to reflect on his points but, at the moment, I am not entirely satisfied by his response. Notwithstanding the generous spirit in which he put forward his response, we are concerned about the issue and may wish to return to it on Report. 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. 69, in page 19, line 38, leave out 'or negligently'.

Photo of Mr Nigel Beard Mr Nigel Beard Labour, Bexleyheath and Crayford

With this it will be convenient to consider the following amendments: No. 70, in page 20, line 14, leave out 'or negligently'.

No. 72, in clause 35, page 22, line 21, leave out 'or neglect'.

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

The amendment stands in the names of several hon. Members, but I shall speak to it first.

We are dealing with the same issue, which is the distinction between fraud, on which we are all keen to clamp down, and innocent error. At one end of the scale, many Conservative amendments are aimed at toughening the Bill's provisions on fraud, and I understand that, but the motivation behind this group of amendments is to ensure that the provisions on people who are subjected to penalties and, with amendment No. 72, interest penalties do not apply to people who make genuine errors. To have an idea about why we are concerned about that, it is worth reading a sentence from the explanatory notes on clause 29, which say:

''Clause 29 provides for a penalty of up to £3,000 to be imposed on any person who fraudulently or negligently provides a false or incorrect statement or incorrect information or evidence in respect of a claim''.

If we take out the part about fraud, on which we all agree, and the part about false or incorrect statements, we get this:

''Clause 29 provides for a penalty of up to £3,000 to be imposed on any person who negligently provides incorrect information''.

We have discussed the difference between negligence and wilful negligence. The Minister suggested that adding ''wilful'' would give the lawyers a field day, but it seems to me that any definitional issue makes a field day for the lawyers. They will spend just as long and earn just as much discussing what negligence means as they would discussing what wilful negligence means. It would benefit the innocent to strengthen and clarify what we mean by negligence, although the three amendments would take out the relevant part altogether.

The Bill contains clauses concerning penalties and interest. Someone who was deemed to be negligent, although a lay person might not judge them to be culpably negligent, could face a combination of repayment of overpayment, interest on the overpayment, a penalty charge, interest on the penalty charge and, if the negligence bordered on fraud, that panoply as well. Do we need all of those measures?

For people on high incomes, an error on their income would probably not affect their entitlement, but if people on low incomes get something wrong, it would affect what they receive. We are dealing with a client group who are generally on low incomes and understandably might neglect to keep proper records. The culture shock for the highest earners in the land of the record-keeping implied by self-assessment was quite something, and many people still rely on the traditional shoebox technique. If we extended that to a group of people whose incomes are much less predictable, whose record-keeping is on average likely to be poorer, and who do not have accountants, it would make it much more likely that they would neglect to record or supply something.

A related issue refers back to clause 14(2) and concerns a person who fails to supply information—perhaps some supporting information for a claim. Such people can be deemed to have supplied the information. For example, if a person is sent a form asking whether their circumstances have changed and they do not send it back—it gets stuck behind the sofa

or they are busy with other paperwork or whatever—they are deemed to have said that their income has not changed.

Should it transpire that the income has changed by a relevant amount, the system says that that is negligence, which incurs a potential fine of up to £3,000, recovery of the overpayment, interest on the overpayment and possibly also interest on the penalty charge should the person not have current means. In the clause 28 stand part debate, the Minister said that interest would be charged for negligence and not only for fraud.

We are hammering people with a concept of record keeping that goes beyond anything they have previously faced. By proposing in the amendment that ''negligently'' be removed, we seek Government reassurance us that they will only go after people who exhibit culpable or wilful negligence. Such cases are on the borderline of fraud and are far from those at the other end of the spectrum involving people who are not good at record keeping, whose lives are haphazard, or whose dealings with officialdom are somewhat chaotic. We have all met such people and we do not want them to be fined £3,000.

Photo of James Clappison James Clappison Shadow Spokesperson (Treasury) 6:15, 22 January 2002

The Committee has had a trailer of my views on this matter in the comments of my hon. Friend the Member for Arundel and South Downs. I have sympathy with some of the remarks made by the hon. Member for Northavon. We must be vigilant about public money, ensuring that it is properly returned and that people who have been negligent are penalised when appropriate. However, we must also be realistic about the circumstances of some of those who fall within the ambit of the system, their resources and, in some cases, their culture.

We are discussing negligence, which, under the new system, is a failure to discharge duties. On top of everything else, we are imposing additional duties on claimants under the new system of yearly income assessments and the requirement on them to notify of changes in their circumstances. By extending the duties that we place upon people, we increase the scope for potential negligence. The Minister must give us a careful explanation that strikes a balance between vigilance and realism.

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

I shall deal first with the point made by the hon. Member for Northavon about lawyers when they discuss fraud and negligence. I am sorry to disabuse him of another of his cherished illusions, but he is mistaken in his belief that it is not possible to excite legal activity by introducing words into legislation that, of their very nature, excite a feeding frenzy among lawyers. Anything that suggests an additional mental element in criminal or civil law will lead to extra debate among lawyers. Terms such as ''knowingly'' and ''wilfully'' are the subject of much discussion among lawyers.

No doubt like my legal colleagues on the Committee, I have spent many a happy, lucrative and productive hour discussing the additional element required to satisfy a definition that contains ''knowingly'' or ''wilfully''. That is why, although it

is difficult to get rid of the term ''knowingly'' from the law, great efforts have been made by parliamentary draftsmen for many years to avoid using the term ''wilfully'' because it adds little other than an opportunity for lawyers to discuss the additional import of the word.

A problem surrounds the concept of wilful negligence. Is it not somewhat a contradiction in terms? If one has a sufficient will to do something, can one be held act negligently? I see the look on the face of the occasionally—mercifully, normally—silent one on the Conservative Benches to whom, surprisingly, Liberal Democrat Members sometimes defer. It is a dangerous practice to defer to Conservative Whips—even Conservative Members seldom defer to their Whips. I know that I am trespassing on ground that you would not want me to explore, Mr. Beard.

I assure the hon. Member for Northavon that nothing is served by adding the term ''wilful''. For years, the term ''fraud and negligence'' has existed in law in relation to tax, national insurance contributions and, now, tax credits. It is well understood by lawyers, advisers and those who have an interest in those matters. In our view, there is no point in tampering with it. It does not include, and does not result in, penalties or interest for those who have made an innocent error. People who have made an innocent error will not be trapped by that phrase, or, indeed, by the provisions that the hon. Gentlemen seek to amend.

The purpose of clause 29 is to provide for financial penalties when a person fraudulently or negligently makes an incorrect statement in relation to tax credits, or provides incorrect information.

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

The Minister is responding helpfully. Will he give an instance of an action that would be negligent but not fraudulent in this context?

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

Yes. If, in the hurry of a late return of information, an item were omitted innocently—through an oversight—there would not be a problem. However, as the hon. Member for Hertsmere mentioned earlier, when a course of action has been taken that is clearly motivated by a deliberate and dishonest attempt to draw a veil over certain activities and obscure them from the attention of the Revenue, that is fraud. One is deliberate dishonesty, while the other is failure to take reasonable care. The third category is omission by accident. If one has made no attempt to communicate, one has shown unwillingness to respond to queries, or one has shown a determination to take no interest in ensuring that the Revenue is aware of a relevant fact, that is clearly a failure to take reasonable care.

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

My hon. Friend has been extremely helpful in explaining the matter, but I am still a little worried. That is partly because of the examples—with which all Committee members will be familiar—of people whose level of functional literacy is not high. Such people are not used to regularly completing forms unaided. I would be most worried about those whose record keeping is shambolic. Into what category of treatment would they fall? How will people cope if they do not have the experience and literacy skills needed to

compile the information for which they are to be asked?

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

Let me give an example. Someone who fills in an incorrect income figure because he cannot be bothered to look at his payslip is not being fraudulent, but negligent; he is not taking reasonable care. Let us suppose that someone puts down £175, when the figure is £195. That could be the result of an innocent misreading of the payslip, which is in script form. However, if a person writes down £95, it would be harder to believe that such action was innocent. It might not be fraudulent action, but it shows a lack of reasonable care. If there were a query and the person still wrote down £95, it would show that he had stepped over the boundary from negligence, and that his action was fraudulent.

We all know from constituency experience that some people lead lives that appear shambolic to others. However, it would be wrong to believe that they have no clear sense of what is coming into the home and what is going out. Sometimes, they have a clearer sense of outgoings than income, but in the main people are fairly clear about such matters, even if some of the detail is fuzzy. It would not be right to underestimate people's capacities in such matters.

My hon. Friend the Member for Regent's Park and Kensington, North (Ms Buck) is right to remind the Committee to make sure that the guidance given, the discretion exercised and, when it is relevant, the prosecution's policy take the whole picture into account. Often the recipients of tax credits do not have the degree of familiarity with forms and figures that can be expected of those who utilise the PAYE system.

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

I said previously that I expected a learned member of the Committee to correct my use of the words ''wilful negligence'' and to define them better than I can. However, I used that term before because I worry about people who make mistakes at the boundary—not between negligence and fraud, but between negligence and error. We are dealing with people whose lives may be shambolic and who have difficulty dealing with forms, let alone tax return forms, because they have never had to deal with them before. Most of us are fairly intelligent, but we struggle with tax return forms—I certainly do. I put up my hands and am honest about it.

Some people are on the edges. One person's negligence is another person's lack of understanding. We want an assurance that people will not be hurt or penalised through another's lack of understanding.

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury 6:30, 22 January 2002

I hope that I have made it clear that we do not intend to include innocent error in the category of neglect or fraud. Everything that my hon. Friend the Paymaster General and I have said reinforces our intention to ensure, with aid of the Revenue and the National Association of Citizens Advice Bureaux, that understanding of the provisions is thorough and that people are aware of their responsibilities and rights. As in every other area of

life, we must strike a balance between rights and responsibilities.

There is a long-established test of negligence, which will apply to those who failed to take reasonable care in making their claims, or in providing information. Circumstances are relevant: bereavement or family crisis, for example, are relevant to determining the reasonableness of people's responses. There are no penalties for innocent mistakes, and the Revenue has to prove fraud or negligence. If there were a dispute about an accusation of negligence, it would be resolved by the tax commissioners. I know that hon. Members have concerns about the appeals process, but the commissioners are experienced in deciding cases of negligence. They understand the test, and will be well placed to apply it.

In the light of that detailed explanation, I hope that the hon. Member for Northavon will withdraw the amendment, and that the hon. Member for Hertsmere will not press for a vote.

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

We are grateful to the Minister for his expertise and comments. Perhaps it was unfair to spring the question on him, but when I asked him what might constitute negligence, but not fraud, the first example that came to his mind was a person who is in a hurry to submit the form and misses something out. If that is negligence, it falls in the scope of the penalties. I would not want such a person to suffer a £3,000 fine.

The Minister gave other examples that more clearly illustrate the definition of negligence. We are in a grey area, but our amendments are somewhat blunt in their proposed removal of all references to negligence. The Minister referred to an instance in which a person had a pay slip but did not bother to look at it. However, we do not want people to reach the stage of appealing to tax commissioners. The clause is too sweeping in scope, and we might want to refine the types of negligence that we want to exclude at a later stage. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of James Clappison James Clappison Shadow Spokesperson (Treasury)

I beg to move amendment No. 18, in page 20, line 1, leave out ''£3,000'' and insert ''£5,000''.

Photo of Mr Nigel Beard Mr Nigel Beard Labour, Bexleyheath and Crayford

With this it will be convenient to discuss the following amendments: No. 19, in page 20, line 10, leave out ''£3,000'' and insert ''£5,000''.

No. 20, in page 20, line 18, leave out '£3,000' and insert '£5,000'.

Photo of James Clappison James Clappison Shadow Spokesperson (Treasury)

As I said earlier, the distinction between fraud and negligence is that the fraudulent applicant sets out to deceive the system and knowingly engages in fraud. In our consideration of earlier amendments, I was unable to persuade the Minister that there should be a more serious regime for fraudulent statements, and that those who make them should be prosecuted for fraud. I invite him to consider that there should instead be a more serious penalty under the penalty regime for people who behave fraudulently. A maximum penalty of £3,000 is not sufficient. A maximum penalty of £5,000 should be

available to cater for the worst cases: those who commit fraud by making fraudulent statements.

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

I expect the criminal sanction to apply in the worst cases, in which there is serious or organised fraud. Let us be up front about that. However, we are discussing a civil penalty. Although I share the hon. Gentleman's revulsion of fraud of any sort, I am not persuaded that there should be a distinction between the current tax system, in which a maximum civil penalty of £3,000 is set, and tax credits. That is a bit like the old suggestion that social security fraud should be punished more severely than any other form of fraud or theft from the public purse. That is not borne out by proper sentencing policy.

Fraud is unacceptable and must attract a penalty. I am not convinced that the penalty for those who are negligent or commit fraud in relation to PAYE should be less than the penalty in relation to tax credits, simply because PAYE has always existed in its current form and tax credits are a development of the social security system. It would be unfortunate if that were to creep into our thinking. They should be treated alike. As the current maximum penalty is £3,000 for the ordinary tax system, so it should be for the development of that tax system in the form of tax credits. The case has not been made for more stringent penalties for tax credit claimants compared with others who have breached their tax obligations.

Nevertheless, I take the point that it is important to mark any act of fraud or negligence that has caused loss to the public purse through the tax system in a way that is commensurate with the harm done. The good news is that that will be the case under the system that we propose, just as it is under the current system. Because the penalty applies to each claim, if a person has persisted in making incorrect statements over a period, the total maximum penalty will far exceed £3,000. Those responsible for prosecuting such cases—it is not a matter for Ministers—will prosecute the more serious cases using the criminal sanction. For the civil sanction, the penalty should remain £3,000. I hope that the hon. Gentleman is sufficiently satisfied, if not persuaded, not to press the matter to a vote.

Photo of James Clappison James Clappison Shadow Spokesperson (Treasury)

We want to treat any case of fraud as a serious matter. I take issue with the Minister about whether public sector benefit fraud is treated as seriously as private sector fraud, when someone who obtains funds by similar deception—making a false statement—from a building society, bank or other financial institution faces a penalty of criminal prosecution. The statistics seem to show that prosecutions for false statements in the benefits system are few and far between. That is a debate for another day. We will come to it when we deal with later clauses.

I will consider carefully what the Minister said. I am far from satisfied with his response as I believe that there should be a more serious penalty for those who commit fraud. Given that I may wish to return to the issue later, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 29 ordered to stand part of the Bill.