Loss of Tax Credits Regulations 2013
(11 years, 8 months ago)
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Lord Freud
That the Grand Committee do report to the House that it has considered the Loss of Tax Credits Regulations 2013.
Relevant document: 19th Report from the Joint Committee on Statutory Instruments.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud)
My Lords, these regulations were laid on 4 February 2013. I confirm that in my view they are compatible with the European Convention on Human Rights. They support the new powers introduced in the Welfare Reform Act 2012 to enable HMRC for the first time to apply a loss of tax credit penalty to fraudsters.
First I will explain why we need these regulations. Benefit and tax credit fraud has reached a level that is far too high. Around £1.9 billion a year is fraudulently claimed in benefits and tax credits, of which £0.7 billion relates to tax credit fraud alone. The Government have introduced a number of measures to reduce the level of fraud, such as working with credit reference agencies and developing screening technologies to check for potential fraudulent tax credit claims. However, we now need to move towards improving deterrents in order to stop in their tracks those who are thinking about committing fraud. We also need to change people’s perception that tax credit and benefit fraud is acceptable behaviour and worth the risk.
Research conducted by the Department for Work and Pensions shows that 41% of benefit claimants believe that benefit fraud is “easy to get away with”, and one-third thinks that the current penalties are “not too bad”’. Therefore, we need to send a strong message that fraudulent behaviour by tax credit claimants will not be tolerated by the taxpayer or by honest fellow claimants. Our aim is to provide even stronger deterrents to those who set out to defraud the tax credit and benefit systems. We are therefore introducing tougher penalties, increasing the length of penalties, and extending their scope to include tax credits.
The Department for Work and Pensions has already introduced comparable regulations that contain tougher powers to apply a loss of benefit to those making fraudulent benefit claims. These were debated and agreed by your Lordships’ House on 13 February. The draft regulations before noble Lords today support the wider joint DWP-HMRC strategy to reduce benefit and tax credit fraud, which was introduced in the Welfare Reform Act 2012. Jointly they will send a clear message to fraudsters that claiming benefits or tax credits to which they are not entitled will have severe consequences. They will also tackle the perception that tax credit and benefit fraud is too easy to get away with. We also intend to ensure that those who commit the most serious offences, such as organised or repeat offences, will receive the most severe penalties: losing their benefits or tax credits for up to three years. Most claimants are honest and abide by the rules, but to those who are not we want to send a clear message that if they try fraudulently to claim benefits or tax credits, they will face the consequences of their actions.
Noble Lords will be aware that tax credits comprise two elements: child tax credit and working tax credit. Child tax credit provides financial support for families with children whereas working tax credit provides financial support for working families. The Welfare Reform Act 2012 enables HMRC to withdraw payment of working tax credit for those who are convicted or cautioned, or who agree to pay a DWP administrative penalty as a result of a benefit offence. The 2012 Act also provides for the length of the loss of working tax credit period, and the loss of tax credits amount, to be reduced where there is an innocent party in a couple claiming tax credits. Finally, the Act prescribes what constitutes a benefit offence.
The length of time a loss of tax credit penalty is imposed will escalate depending on the number and severity of the offences. It will be applied for four weeks, 13 weeks, 26 weeks or three years. The 2012 Act also introduced provision for an immediate three-year loss of tax credit or benefit penalty to apply where a person is convicted of a relevant offence. “Relevant offence” generally means an offence of serious organised or identity fraud.
Although the loss of tax credit penalty will be applied to working tax credit, I reassure noble Lords that while child tax credit will be a disqualifying payment from April 2013, it is not a payment to which a loss will apply. In other words, although a fraudulent claim for child tax credit will count as an offence, the penalty will be applied only to working tax credit or another relevant benefit. I therefore reassure noble Lords that child tax credit payments will not be reduced or stopped for claimants who receive a loss of tax credits penalty.
On the detail of the Loss of Tax Credits Regulations being debated today, the regulations prescribe that the loss of tax credits penalty will begin from the 30th day after which HMRC is notified of the benefit or tax credit conviction, administrative penalty or caution. The regulations also provide for the payment of working tax credit to be reduced by 50%, not 100%, where there is an innocent party in a couple who have made a joint claim for tax credits. Where both partners are subject to a benefit or tax credit offence, the deduction would be 100% of the payment of working tax credit. This will include any element of working tax credit to which a claimant would be entitled, including childcare costs or disability elements. The regulations provide that the loss of tax credits will apply only to an applicable benefit offence that is committed wholly on or after 6 April 2013. It will not apply to offences committed before that date in relation to which a conviction is obtained after 6 April.
To summarise, in order to send a clear message to those who are thinking about committing benefit or tax credit fraud, we have strengthened the loss of the benefit penalty regime and expanded the scope to include tax credits for the first time. The increase in scope and the length of penalties reflect the seriousness of benefit and tax credit fraud, and aim to provide an effective deterrent. These regulations were referred to the independent Social Security Advisory Committee on 7 November 2012. I therefore seek your Lordships’ support for the regulations here today, and commend them to the Committee.
Lord Eatwell
My Lords, I am grateful to the Minister for introducing these regulations. Broadly, from this side of the Committee, we support them wholeheartedly. However, they raise a number of questions in my mind which I would be grateful if the noble Lord could answer.
On my first, broad-brush, question, the Minister referred to the scale of benefit fraud as £1.9 billion a year. Can he tell the Committee how this compares to the Treasury’s estimate of the losses due to tax avoidance and evasion? I think he will find that the estimate of losses in those areas is many, many times greater than that for benefit fraud, even though there is, quite rightly, a condemnation of benefit fraud.
The specific measure, as the Minister told us, removes benefit from those who have been fraudulently claiming it. Has the department or the Treasury investigated whether those people from whom benefit is being removed actually needed the money, and whether there are those who did not need the money? If a relatively wealthy crook is pursuing benefit fraud, taking the benefit away from them costs them nothing. They have just taken a punt on a particular scam and now they have lost out, so this measure does not really matter very much. However, if they were people who were actually impoverished but for some reason or other were not adequately covered by existing regulations and were then behaving fraudulently, they may not now have anything to live on. What are they supposed to do? Do we have an estimate, among these fraudsters who are depriving us of £1.9 billion, of those who needed the money and those who did not?
I raise this particularly because the Minister’s welcome remarks on child tax credit suggest that there is a feeling, perhaps not in the Treasury but in the department, that people may need the money; the Treasury never thinks that anybody needs any money. I am a bit puzzled as to the nature of this penalty. Of course, if somebody is fraudulently extracting funds from the Government, from the taxpayer, they should be stopped from doing so. However, if it so happens that this person will then be completely impoverished, we must ask what our society will do about them. This comes back to whether they needed the money. How many of these fraudsters are in fact quite well off crooks from whom this is a trivial change, and how many of them are people whose circumstances are so desperate that they are willing to break the law? Of course we should not allow them to break the law, but can we consider what the circumstances of such families might be once the appropriate penalty is applied?
Lord German
My Lords, I, too, welcome these regulations, but again they are a round two as they match the Social Security (Loss of Benefit) (Amendment) Regulations 2013. I have a number of questions. The first relates to what happens under universal credit to the various sets of regulations that we have been discussing today, which also have their mirror in regulations brought forward by the DWP. It may be a bit of a heresy to say this, but if we are to have separate regulations from separate departments, might it not be a little more useful if we were to back to back them in the same slot so that we could at least look at them together and perhaps save a fair bit of time and effort? Universal credit gives us that opportunity, since we will be looking at these regimes in the round.
My second question relates to the three-year sanction, which is the heaviest of all the sanctions, and the use of the words “deliberative or organised offences”. Has that definition of what is a deliberative offence and what is an organised offence been codified in the handbook and regulations given to decision-makers—both those in the Treasury and obviously those who are to be responsible for universal credit—in order that the level of understanding is of a high nature? When someone goes to court and gets a sentence, we can see that being clearly identified. However, there may be occasions when this is dealt with outside the court through an administrative procedure, in which case there needs to be a clear understanding of when these heavier sanctions will be applied.
I understand that the decision-makers will also be given a level of discretion about the boundaries between some of these sanction periods. Can my noble friend say a little more about the nature of that discretion and whether a framework will be given to the decision-makers in each of these cases, so that we have some certainty that the worst and most difficult offenders will be given the heavier sentences? Will there be any form of appeal internally, apart from the normal tribunal case, where someone has appealed against their sanction? Perhaps my noble friend could give us some idea of how that mechanism will work.
Lord Freud
My Lords, let me try to deal with the points raised. There was a rather interesting question from the noble Lord, Lord Eatwell, about the division between what I think he would call the crooks and the desperate. The best way I can approach that is to look at the way in which fraud develops. I think it is right to say that 80% of the fraud develops out of people not informing of a change of circumstance. There is a drift there that indicates that we are not talking about that many who are desperate because, in one circumstance, people were clearly functioning at a certain level of benefit or tax credit. They then got supplemental income elsewhere and kept the extra, to which they were not entitled. That is quite a typical fraud, so on balance we are talking about crooks here. That is the best figure that I can give the noble Lord. I certainly have not seen anything better, and as your Lordships can imagine I see quite a lot of data.
One of the points that my noble friend made at the end of his last question was about discretion. I must make the point that we are now talking not about the conditionality sanctions, which this can often be confused with, but about people who have committed fraud, have usually gone to court and have had a punishment laid down by the court. There is no doubt about that and it is not in the discretion of our decision-makers. That is not true at the margins, where people accept an administrative penalty, which is at a much lower level. However, as you move up the scale, with repeat offences and the serious offences that we are most concerned about, it becomes a court matter and, to that extent, is not a matter of our codification. The serious offences that I am talking about are laid down in regulations. I speak from memory but I think we are talking about £50,000 offences, serious identity fraud such as trying to pass yourself off with a different identity: that kind of thing.
On my noble friend’s last point, we are bringing the regulations on working tax credit closely together with what happens to today’s benefit system, with a view to pulling both of those into the UC sanction regime. They are being pulled together with a view to there being relatively little change in the overall approach and amount when UC comes into effect for particular people.
I think that covers all the issues that have been raised. The amount of money, £1.9 billion, is substantial, and we want to make sure that it is fully realised that this is not acceptable or safe behaviour. I do not have to hand a comparison with our estimates on tax evasion and tax avoidance. Tax avoidance, as the noble Lord, Lord Eatwell, will be fully aware, is a different matter from tax evasion, but our concern about tax evasion is at absolutely the same level—it is the same offence as defrauding the benefits system.
We need to send out a strong message that this type of fraud is not tolerated. We also believe that, although fraudsters must be promptly and severely dealt with, innocent parties should be protected, which is why this relates only to working tax credit and not to child tax credit, and why we will only reduce working tax credit by 50% in households where one member of a couple has not committed an offence.
I seek the support of noble Lords for these regulations. Indeed, I hear that I have it and I commend them to the Committee.