§ 7.31 p.m.
§ The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Hollis of Heigham) rose to move, That the draft regulations laid before the House on 9th July be approved [35th Report from the Joint Committee].
§ The noble Baroness said: My Lords, it may be for the convenience of the House if I deal with the first of the four sets of draft regulations on the Order Paper 746 together with the third set dealing with income thresholds and determination of rates. I understand that it may be convenient for the Opposition Benches if I do so—and similarly, if I take together the second and fourth sets of regulations on the Order Paper, those dealing with entitlement and maximum rate and the child tax credit regulations.
§ The regulations dealing with the definition and calculation of income define what is income for the purposes of claims to the new child tax credit and the working tax credit.
§ For the new tax credits, income broadly corresponds to income from taxable sources—such as earnings from employment and self-employment, certain social security benefits and income from a variety of other sources such as savings and investments, property, overseas income and income from trusts and estates. We believe that this provides a fairer measure of income which is more closely aligned with the income tax rules.
§ Perhaps I may briefly outline the main features of the draft regulations. Draft Regulation 3 sets out the steps to be taken in working out the total income of the claimant (or claimants) to be reported in tax credit claim forms.
§ Draft Regulations 4 to 12 set out in detail the extent to which various categories of income are taken into account in calculating a claimant's total income for tax credit purposes. These include employment income, as well as income from self-employment, pensions, taxable social security benefits, income from property and income from most savings and investments. With the last of these, it is taxable income from capital that claimants will have to report rather than the capital itself; we also propose to disregard income from various tax-exempt savings vehicles such as ISAs or some tax-free National Savings products. We believe that this will help low-income individuals in receipt of tax credits to build up the level of their savings.
§ Draft Regulations 13 to 17 are, in large part, anti-abuse provisions.
§ Draft Regulation 14 deals with cases where, under tax law, capital is treated as income and is taxable as such—for example, when individual shareholders receive a "stock dividend"—that is, new shares—instead of the normal cash dividend. I should emphasise that we are not necessarily dealing with avoidance in this category. Secondly, the regulation also covers cases where income is diverted from one person to another through a trust or settlement, in which event the income is treated as remaining in the hands of the first person.
§ Draft Regulations 15 to 17 are based on the existing rules used in the working families' tax credit and the disabled person's tax credit system, which are a long-standing feature of the social security system. They seek to ensure that no one deliberately deprives himself or herself of income, or fails to apply for it, which could have had a bearing on his or her entitlement to tax credits.747
§ Draft Regulation 18 brings other taxable miscellaneous income into account for tax credit purposes.
§ Finally, draft Regulation 19 provides for various disregards from the calculation of income in tax credit claims. One such disregard is that of maintenance received by single parents. I am sure that noble Lords will be pleased to see that they receive the credit unabated by any of the taper of the working families' tax credit or the child tax credit. This continues the existing practices under the working families' tax credit.
§ These draft regulations have been subject to detailed consultation with various outside bodies, which have made a valuable contribution to making sure that they fit the purposes of the Act.
§ I turn to the draft regulations dealing with income thresholds and determination of rates—those which I suggested to the noble Lord, Lord Higgins, combined algebra with Esperanto. I am sure that he now thinks that they are a model of clarity. This is a set of technical regulations containing the detailed rules setting out how the amount of tax credit due is calculated in each case. The regulations also set out the income thresholds below which a claimant would receive the maximum amount of each tax credit.
§ Although these regulations are technical, the substance of them was announced by my right honourable friend the Chancellor in his Budget. For instance, my right honourable friend announced that working households with an annual income of £5,060—that is a real figure not a notional one—will receive the maximum amount of working tax credit to which they are entitled. Similarly, families will receive maximum child tax credit if annual income is £13,230 or less. This is provided for by Regulation 3.
§ In the Budget we also provided details of how the new credits would respond to changes in income. Any claimants with less income in the current year compared with last year will have their final entitlement based on their current year income. On the other hand, a claimant whose income rises in the current year may also have his or her award based on current year income, but only when their current year income exceeds the previous year's by more than £2,500. There is no cliff edge. It is only at that point that it is taken into account. It is designed to give head space and not to discourage people from increasing their income in the course of the year.
§ We have also made it clear that recipients of safety-net social security benefits—such as income support and jobseeker's allowance—who are responsible for children will automatically receive the maximum rate of child tax credit for the whole period during which they are receiving them. They will not be subject to a further income test in tax credits while they are receiving one of those benefits. This is provided for in Regulation 4, which prescribes income support and income based JSA as the safety net benefits.
§ The remainder of the regulations set out the manner in which the rate of tax credits should be calculated when income exceeds the thresholds and the taper 748 rates must be applied. These provisions are set out in a formulaic manner to show precisely how the tax credits system will calculate the rate in any particular case.
§ Claimants themselves will not have to grapple with these technicalities. The detailed calculation will not be sent out to claimants as a matter of course, although they will be able to request a copy if they wish. The calculation will be done by the Inland Revenue, which will be able to talk claimants through the calculation if they so wish.
§ I am happy to explain in further detail how the calculations are done—in other words, to seek to gloss the regulations. If your Lordships want me to do so, it may be better if I do so in summing up. What is happening may be clear from what I have said, but I am perfectly happy to expand on how the calculations are done if the House would think it helpful; equally I could at this stage leave it to noble Lords to decide whether they wish to press me further on this matter. As I see no great enthusiasm for greater description at this point, with those comments I seek the assent of the House to the regulations. I beg to move.
§ Moved, That the draft regulations laid before the House on 9th July be approved [35th Report from the Joint Committee].—(Baroness Hollis of Heigham.)
§ Lord Freeman
My Lords, the Minister referred in her helpful introductory remarks to the fact that claimants will not have to grapple with the detail of the calculations. I wish to refer the Tax Credits (Income Thresholds and Determination of Rates) Regulations 2002 and draw the attention of the noble Baroness to the problems that will arise and which will need to be watched carefully if a family's circumstances change halfway through the year and there becomes, alter the end of the tax year, an obligation to repay tax credits. These are dealt with in Regulations 7 and 8 of the set that I have referred to.
The problem arises because two different bases of calculations are used. During the course of the tax year, time apportionment applies in calculating the prospective credit to be paid if a family's circumstances change. At the end of the tax year, averaging takes place, which may give rise to an overpayment of tax credit and therefore a requirement to repay.
I do not intend to labour the point, but I shall give a simple example of a couple in which one party is working 16 hours a week and earning only £10,000 a year. They have one child. Their yearly entitlement to tax credits is £3,186, I believe. Half way through the year, on 5th October, the other member of the couple gets a job and starts to earn £30,000. The couple's joint income for the tax year becomes £25,000—half a year at £30,000 plus the remaining £10,000 earned by the first member of the couple. The couple will lose entitlement to all credits except the family element of £545. For the first six months of the tax year their income was only £5,000 and they would have been paid credits of £1,593. When they are sent their end of year notice under Section 17 of the Tax Credits Act, 749 they will be notified of an overpayment of credits of at least £1,320, which will be reclaimed, because their total income for the year is averaged out.
Apart from the fact that that appears manifestly unfair, claimants will not realise that getting a job part way through the tax year can result in the recovery of tax credits for a period when their income was low.
That aspect of the regulations needs to be looked at. At the appropriate time, when details of how the new tax credits are working in practice, your Lordships should return to the subject and press a resolution of the conflict between time apportionment and averaging.
§ Lord Higgins
My Lords, one of the more infuriating aspects of media coverage at this time of year is the way in which they seem constantly to say that Parliament has risen for the Summer Recess when that is not the case. We are here this evening debating an undoubtedly important matter, although it may be complicated for the media. I exonerate from my remarks just now the BBC television parliamentary programme, which does better at this time of year. Instead of transmitting our proceedings at 5 o'clock in the morning, it sometimes does so as early—or late—as 10 or 12 o'clock.
The regulations cover the disbursement of £2.7 billion to particular groups of people. That is effectively the amount that the Chancellor raised in his Budget from national insurance contributions from individuals. The object of these statutory instruments is to implement over time the Act that we have recently spent a great deal of time debating, during which the noble Baroness provided us with a number of draft statutory instruments. Much of the detail that one might otherwise go into is not necessary, because we only recently discussed the definition of income and other issues. This is a question of tying up loose ends, although my noble friend Lord Freeman has made an important point. I understand that we have some time to consider it, as the point at which payments are made under the Act is a considerable time ahead.
It is convenient to discuss the two statutory instruments together, as the noble Baroness described. The first is concerned with the definition of income and the second is concerned with income thresholds and determination of rates. The first is concerned with the qualifications and the second deals with what you get if you meet the various qualifications for a tax credit.
As we have said time and again, this is a considerable extension of means tests, up to very high levels of income—up to £50,000 a year. When we discussed the Bill I said that it was appropriate to have regulations for particular quantities or aspects of the matter that changed over time, but not for permanent matters, which ought to be on the face of the Bill. The regulations sensibly deal with things that are open to subsequent amendment, by and large.
However, as my noble friend Lord Freeman said, individuals will have very limited understanding of what is happening. The Minister said that the 750 department will talk people through it, but the idea of discussing some of these matters on the telephone fills me with alarm. Considering some of the calculations, the amount of likely misunderstanding will prove a much greater problem than the noble Baroness suggests.
On page 5 of the first of the regulations, dealing with people who are overseas, I am puzzled by some of the matters that can be deducted in calculating income. For example, I do not understand why,any banking charge or commission payable in converting to sterling a payment of income which is made in a currency other than sterling",should be deductible. That seems a perfectly normal cost that is likely to be incurred in the circumstances described.
The next point that gives me considerable cause for concern arises in the table on page 7 of the first of the regulations. It is concerned with payments disregarded in the calculation of employment income. Item 9 lists the incredibly anachronistic extra-statutory concession that,Any cash payment received by the claimant as a miner in lieu of free coal, or the provision of coal itself, in relation to which income tax is not charged under Inland Revenue Extra Statutory Concession A6",shall be disregarded. In this day and age, I do not understand why that concession should remain. I am even more puzzled by the way in which it is suddenly incorporated into this statutory instrument. The Inland Revenue concession mentioned is extra-statutory, but the regulations effectively put it into statute, which seems very strange. It is particularly difficult to understand given that the Revenue can change the conditions, qualifications or terms of the extra-statutory concession. That seems to give the Revenue the power to change its mind after we pass these regulations in statutory form.
The noble Baroness suggested that the regulations on income thresholds and determination of rates were Esperanto rather than algebra. Once again, I regret that we do not have a blackboard to draw up the five pages of possible algebraic calculations that are expounded. They will be very complicated and apparently the department will discuss each calculation with individuals on the telephone. It is not that they are not clear. If one reads all five pages, provided that one has at least an O-level—or probably an A-level, or whatever the appropriate qualification is nowadays—in algebra, one can probably get through them quite easily. They are perfectly clear, but they are extraordinarily complex. I think that both these sets of regulations are very much Inland Revenue-based regulations, whereas the other two sets of regulations are more concerned with the traditional work of the Department for Work and Pensions.
I have one particular point on the algebra. Some of the algebra deals purely with the terms of particular items such as MR over MI, which are defined in the text. However, some of the formulas include absolute numbers—such as £5,060 x N2 over N1. I hope that the noble Baroness can explain to us what these absolute numbers actually represent. If they represent 751 the threshold or the rate or whatever it may be, will amendment of these statutory instruments simply alter the particular numerical figures enmeshed in the algebra?
Although these regulations are extremely complicated, on the whole they are not out of line with the debates that we had and the points that we raised when discussing the legislation itself. I therefore hope that we can have some clarification of these particular items which I think it was right to select in the course of our discussion.
§ Earl Russell
My Lords, after an afternoon in which the Government may perhaps not have regarded me as being particularly helpful, it is a pleasure to have in front of us regulations to which I can give a very warm but not altogether unreserved welcome. These regulations are attempting to do something rather good: they are attempting to produce a smoothing out process in the level of income between the disadvantaged and the more advantaged which I think will probably do more to increase equality than almost all the rest of what this Government have done. That I welcome. It is, of course, an extraordinarily complicated operation. While I was listening to the noble Lord, Lord Higgins, I was suddenly reminded of the old rate-equalisation grant which obviously served a necessary and valuable function but was in constant need of constant revision and uprating—as I suspect that these regulations will be, too.
There was one nice moment when the Minister was asking whether we wanted her to explain anything further that I was suddenly reminded of Dame Helen Gardner, at the Lady Chatterley trial, turning to the judge and saying, "You would not want me to explain that—I could".
I shall, however, make one small note of criticism. The Explanatory Memoranda are of not quite the quality that we are accustomed to receiving from the Department for Work and Pensions. In trying to discover what was going on, I had at all stages to turn to the regulations themselves. I did not really have a very clear idea after reading the memoranda.
I deal first with the definition and calculation of income regulations. I shall not resume my debate with the noble Lord, Lord Higgins, about the tapers; we have had that so many times in Committee. I think that we understand each other's positions, which are necessarily different. Most of the provisions follow the forms of operation of the Inland Revenue which are familiar. The provision for diversion of income, of course, will need constant revision. One of the greatest fields of human ingenuity has been finding different ways of diverting money from the Revenue, usually by separating the use of the money from its ownership. I do not think that any century has yet matched the skill of the 15th in doing that, and I hope that the 21st will not be the first to do so. So I shall be ready for occasional revisions of that.
I am very pleased by a number of the disregards in Regulation 19 of those regulations, particularly the one to which the Minister drew our attention about 752 maintenance for children. That is a very valuable and hard-won concession and I welcome it. I welcome also the disregard of student loans as income. That is something which I see with delight. Student loans are not so generous that one can afford them counted as income, and in any case they are not really income as one has to pay it all back again afterwards. I thank the Minister for the disregard of royalties and public lending rights which is a concession to my noble friend Lady Barker.
I am glad to see the allowance of entertainer's expenses. I am reminded of a tax story in the New York Times. There was a violinist in a New York restaurant who, of course, had to wear a black tie every evening. Every year, he was audited by the Internal Revenue Service for his claim for expenses for the cost of laundering and dry cleaning his dress clothes. Every year he came out with flying colours, but every year they did it again the next time. The Minister, by getting this in here, has saved us all a considerable amount of bureaucratic hassle. I congratulate her on it.
I think that the Minister is probably also right to have the minimum cut-off point at £26. My wife receives an old age pension of 37½ pence a week, which I think must cost a great deal more to administer than she gets out of it. So I think that that is a sensible approach to that.
I must admit that I do not entirely follow the algebra in the tax credits income threshold operation. I actually do have an O-level in mathematics, but I got it only by the skin of my teeth. I was never more surprised in my life to be successful in an exam. Regardless, it is not enough to make me understand the algebra here. I think that I understand the theory behind it when it is explained in the Minister's words. I do not think that I have any complaint to make about it.
There is a point on banking charges and the difference between net income and gross income. What one receives from abroad, as I have been recently reminded on receiving a most unexpected royalty cheque from the United States, is actually a very great deal less than the sum on the cheque. So one is actually being assessed on the sum that one actually receives. I cannot see that that can really be a grievance. However, if it really worries the noble Lord, Lord Higgins, I merely say that it would cost us a great deal less if we were to go into the euro.
The noble Lord, Lord Freeman, raised a very serious point. However, to say that it is a serious and important point is not, I am afraid, necessarily to say that it has a logical answer. I remember that the point was made with considerable force in a CAB report, Benefits and Work, which I think was 1996, that the whole social security system, and the Inland Revenue system with it, was designed on the assumption that one was either in work or not in work. The nature of the economy nowadays is such that that is not the case.
I really do not think that there is any logical, coherent way in which any government can deal with that. I cannot see any reason for thinking that any way would be better than the way that we have here. 753 No doubt we shall be wanting to smooth it out in due course, and further regulations will be put before us, and further dinner breaks will be taken up on it. However, I have no complaint to make about the way in which it is done at the moment. It is simply a problem to which none of us has come up with a solution. Since that includes me as much as anyone else, I am in no position to make any complaint. I welcome the regulations only with the few reservations that I have expressed.
§ Baroness Hollis of Heigham
My Lords, I am grateful for that reception. Given the number of detailed questions that could have been put to me about the meaning of these regulations, I am even more grateful for the brevity of the reception.
If I understood him correctly, the noble Lord, Lord Freeman, said that it would be unfair if someone earning £5,000 had to repay some of the tax credit topping up that income when his or her partner started work on a salary of, say, £30,000 per year. He said that they would not appreciate that they would have to repay the credit, which was calculated on an annual basis. However, as the noble Earl, Lord Russell, said, the alternative could be much worse. For example, one person could earn £5,000 for April to May, after which he or she is joined by a partner earning the equivalent of £30,000 per annum. If there were no requirement to repay, they would be receiving taxpayers' money as if their household income was £5,000, whereas in fact the family income was perhaps £32,000 or £33,000. That clearly cannot be reasonable. We shall make clear to clients of the tax credits what the situation is. We have gone some way to soften the problems that occur when there is a modest increase in income by having the £2,500 head space so that people do not have to repay money. I believe the noble Lord would agree that his possible solution, which is to ignore huge increases in income, is worse than the problem that he has identified; namely, that assessments are based on an annual income and it is not unreasonable in the following year to take the previous year's income as the basis with any repayment to follow, give or take the £2,500 head space.
I turn to the points made by the noble Lord, Lord Higgins. I believe that the noble Earl, Lord Russell, answered the point about bank charges. I refer to the practice for income assessment that already exists for WFTC and DPTC. The noble Lord asked about extra statutory concessions. He was kind enough to give me notice of that to enable me to provide what I hope will be a more helpful answer. This is an important procedural point. I believe that I may be able to give the noble Lord the assurances that he seeks. If there were to be a change in the extra statutory concessions reflected in the regulations, for example, if the Inland Revenue wished to add to its list, the tax credit regulations would have to be amended. Such amendments would be brought before this House through the ordinary procedure for regulations, probably through the negative system, as regulation changes to the Tax Credits Act. Were the Inland 754 Revenue to change its extra statutory concessions for tax purposes—I understand that it does not now have to seek parliamentary approval for that—where that had a read-across to tax credits, the regulations for tax credits would have to be amended. There would be proper parliamentary scrutiny of such read-across into tax credits. I hope that that answers the point made by the noble Lord with regard to tax credits.
§ Lord Higgins
My Lords, I understand what the noble Baroness is saying but I am not sure that I am reassured. The situation is satisfactory as regards the Tax Credits Act in one sense, but we are none the less effectively writing into statute extra statutory concessions. I think I am right in saying that in many cases the definition of those has never been clearly established. Therefore, there is a degree of uncertainty over the situation. That is worrying. As far as I know—I may be wrong—this has never been done before. We need to be careful what we do. I am not clear to what extent the list of extra statutory concessions has any statutory basis.
§ Baroness Hollis of Heigham
My Lords, I cannot help the noble Lord on the second point. However, it seems to me that what matters is that the Inland Revenue extra statutory concessions are on parallel tracks with what is disregarded for income purposes and tax credit purposes. The point of that is to seek to align as far as possible the determination of income within tax credits along the lines followed by the Inland Revenue. Should the Inland Revenue seek to change what it regards as an extra statutory concession, as far as I am aware that is not enshrined in the legislation for the Inland Revenue. As far as I know it is not enshrined as such in the legislation that we are discussing, merely that we should replicate what is in the list by specifying in regulations what would be disregarded.
Were there to be any subsequent changes made by the Inland Revenue to its list, we should have to specify that in additional regulations. The terms of the extra statutory concessions are published by the Inland Revenue. The regulations refer to the terms of the concessions as published at a particular date. I believe that Regulation 2(4)(c) was published on 1st July 2002. The point I seek to make is that we are talking about parallel paths. There cannot be any extra statutory read-across from Inland Revenue to tax credits without parliamentary scrutiny intervening between those two steps.
If the noble Lord needs more help from me or from the Inland Revenue on the status of the extra statutory concessions, I shall be happy to write to him. However, I give him an assurance that if there were to be any wish to enlarge the scope of disregarded income for tax credits purposes in order to align tax credits with any changes made by the Inland Revenue for tax purposes, that could be done only as a result of changing regulations which would be scrutinised by this House through the negative procedure, if your Lordships so wished. I am not sure that I can help the noble Lord further but I am happy to try.
§ Lord Higgins
My Lords, I realise that it may not be possible to help me further this evening. However, it appears that the introduction of the measure inhibits the ability of the Inland Revenue to act flexibly with regard to extra statutory concessions in the way it has hitherto.
§ Baroness Hollis of Heigham
My Lords, I hope that the noble Lord has accepted my assurances as regards the read-across from the Inland Revenue to tax credits. However, what he is now worried about is the loop back from tax credits to the Inland Revenue. Rather than try to hypothesise, it is better to write to the noble Lord on that point, if I may.
I am sure that noble Lords will understand why the algebra is complex. In the course of the year some of the relevant premiums might change. For example, as regards the premium for working for 30 hours, a lone parent might decide to work for 20 hours. That means that one has, first, to gross up all the entitlements, then to disaggregate down to a daily basis for each period of entitlement and then to reaggregate before one then starts to set against income and work the taper. That is the reason for the complexity and the reasons that the formula appears so mechanistic.
§ Lord Freeman
My Lords, I am most grateful to the noble Baroness for giving way. I thank her for her earlier comments. While she is on this specific point, I apologise to her that I did not express my arguments as clearly as I should have done. I do not seek to be profligate or to suggest that families being supported by tax credits should receive more than their due. I refer to a specific point which perhaps in the fullness of time the noble Baroness may consider; namely, when a family's circumstances change during the year could we please use averaging rather than time apportionment? If we do that, no problem of overpayment arises and at the end of the tax year a family does not have to be asked to make repayment. I do not suggest that we should spend more of taxpayers' money; it is a mathematical point—to use the phrase of my noble friend Lord Higgins—which I ask the noble Baroness to consider.
§ Baroness Hollis of Heigham
My Lords, I believe that both averaging and time apportionment are taken into account. The following year's entitlement will be based on the preceding year's income. What one cannot do is cherry pick and have the advantages of the tax system—which the noble Lord will welcome—while also seeking to maintain the continued income assumptions without repayment which currently exist under the six month rigidity of the working families' tax credit. As I understand it, the noble Lord, Lord Freeman—although I suspect that he would not own up to this—is seeking to cherry pick the two together. What is important is that we ensure—I shall seek to do so—that the literature and the leaflets we send out to clients and the advice we give them are absolutely clear. There is no solution apart from the one—which I think would be profligate—of public money.
756 The noble Lord, Lord Higgins, asked me about absolute numbers. The figure of £5,060 is a real figure. It represents the income threshold under which one gets the maximum entitlement to working tax credits and above which the taper starts to kick in. It will be reviewed in upratings which are carried into practice by further regulations under the affirmative procedure. Therefore, there will be plenty of opportunity for parliamentary scrutiny.
I welcome the welcome given by the noble Earl, Lord Russell, to the disregards on maintenance, student loans and royalties. I am absolutely delighted about that. I am sure that like me he will welcome the fact that for this Parliament the children's element will be uprated in line with earnings—he required me to be clear on that point in the House—and the working tax credit will be uprated at least in line with prices for the rest of this Parliament.
At the end of the day, we get down to quite techy detail about who gets what and how much. The small details about how much extra disabled children and severely disabled children receive will transform people's lives. I am delighted by the response of noble Lords to the regulations.
§ On Question, Motion agreed to.