Tax Credits (Income Thresholds and Determination of Rates) (Amendment) Regulations 2016

Lord Kirkwood of Kirkhope Excerpts

Monday 7th March 2016 Lords Chamber

[Baroness Manzoor (LD)]

My Lords, I thank the noble Lord, Lord O’Neill, for that overview of the income disregard level applied to working people on tax credits. As I have said previously, I was delighted when the Chancellor decided not to move forward with his proposed cuts to tax credits; however, despite the perception that changes to tax credits were stopped entirely, the reality is somewhat different.

We all know that the cuts to universal credit, while they mirror precisely the tax credit cuts and matter more in the long run, will go ahead, despite the efforts of those on these Benches to stop them. They will, in the long term, affect millions of the low-income working people the Chancellor claims to support. There is also another hangover from the plan to cut tax credits—the change in the income disregard obliquely referred to in the Chancellor’s Autumn Statement. These regulations will reduce the additional amount a person can earn while claiming tax credits in any given year from £5,000 to £2,500, as we have just heard. That means that if a person’s salary exceeds their expectations by more than £2,500 they will face an overpayment at the end of the year.

Overpayments can cause real hardship for those on low incomes, who get what amounts to a bill at the end of the tax year. For those living week to week, this can prove catastrophic, forcing them into rent arrears or limiting their ability to put food on the table. So, the level of the disregard matters. If the Government truly cared about making work pay, they would ensure that the level of the disregard allows people to feel confident in taking on additional hours, or taking a promotion, without worrying that they are going to breach the tax credit disregard and face an overpayment charge at the end of the year.

The income disregard is particularly important for those taking on unpredictable work. I want people to take up a job, assuming they are able, regardless of the job. Unlike some, I do not think, for example, that zero-hours contracts are fundamentally wrong. Indeed, for some people they are a useful tool to balance their work and personal lives. While there are concerns about their exploitation in some sectors and by some businesses, ultimately, we want people to feel able to take up a job, even on zero hours, and feel confident that it is the right decision. So, the level of the income disregard matters in giving people confidence to take up work; setting it at a level where it hits only people whose salary increases substantially is important in giving that confidence.

I do not believe that £2,500 is enough of a disregard to prevent significant overpayments. What is the primary reason for that? We have been here before. The Minister is absolutely right that when tax credits were first introduced by the Labour Government in 2003, the disregard was set at £2,500. The result was £2.2 billion of overpayments, which affected 2 million households—a third of all tax credit claimants—who were hit with overpayment debts that year, many of which ran to thousands of pounds. That meant that millions of low-income working families faced unexpected changes that they struggled to pay for. Do we want to return to that state of affairs? The Labour Government, realising this problem, hugely increased the disregard, all the way up to £25,000. Many would see this as a sledgehammer to crack a nut, but it had the desired effect. Overpayments by HMRC fell significantly in the subsequent three years: from £2.2 billion to £1 billion for the years 2006 to 2009. The Government decided to reduce the size of the overpayment buffer zone: first, in 2010, from £25,000 to £10,000; and then to £5,000 from April 2013. Reports by HMRC show that as the income disregard has reduced in value, overpayments by HMRC, unsurprisingly, have increased. By 2013-14, when the disregard had returned to £5,000, the total amount of tax credit overpayments had again reached £1.9 billion—almost back to 2003 figures.

The £2,500 disregard proposed in the regulations would, in real terms, be the lowest threshold ever imposed on tax credits, given the inflationary changes since 2003. There is a risk that it will lead to further significant increases in overpayments and hardship for low-income working families. Yet in making this decision, the Government have offered little evidence as to what the impact of these changes will be. The original regional impact assessment, which was published alongside all the tax credit cuts, simply scored the savings of the change in disregard, which was mentioned only twice in the entire document. No further impact assessments have been made for these regulations.

In response to the Secondary Legislation Scrutiny Committee, the Government said that they expect that 800,000 people will be affected by this change. However, they seem to offer little explanation of this estimate or of what the average impact on each person will be. We should not allow the Government to make such big decisions, affecting so many people on low incomes, based on so little information. In the Commons, Ministers utterly failed to give further explanation, simply saying that the majority of those hit will be couples, and the majority of those will be male-female couples. That is simply the law of averages, not an adequate explanation of the impact of the Government’s policy. I also note, for those on the Labour Benches who are hesitant to support a Lib Dem Motion to Regret, that their own Front Bench in the Commons stated that the Opposition are seriously concerned about the impact of the reduced figure of £2,500 on low-income families, and rightly divided on the issue. It is therefore surely right for the House of Lords Opposition Front Bench to follow their Commons colleagues in voting against these regulations, albeit on a Motion to Regret rather than attempting to stop the Commons having its way.

The Minister was always likely to say that things have changed since 2003, and indeed he did. He said that this change is because of the new real-time information system, which will cut overpayments as RTI uses monthly pay figures to spot an income rise during the year, so that tax credit payments can be adjusted quickly instead of leaving a debt to be paid at the end of the year. However, organisations such as the Child Poverty Action Group say there is no mechanism allowing tax credit awards to react automatically to many of the changes in circumstances that currently affect entitlement to tax credits, such as a change in the presence of a partner, the number of dependent children, spending on formal childcare, or whether parents work more or less than between 16 and 30 hours a week. Entitlements to tax credits change on the day when these changes occur, yet awards cannot be adjusted until families tell HMRC, which recalculates the entitlement. Overpayments often arise during this intervening period but that will not be picked up by real-time information. How do we know that? Because it is not picked up at the moment. If real-time information worked, we would not have seen, as I noted earlier, the increases in overpayments that have occurred since the £5,000 disregard was put in place.

These regulations will have a big impact on families, but do they actually benefit the taxpayer? I suggest that the benefit is likely to be limited. There is real concern that, in the end, it will end up costing HMRC more in trying to claw back the overpayments than it will have saved in lowering the disregard. HMRC figures show that as of June 2014, no less than £5.6 billion in tax credit overpayments was owed by households, £89 million of which was from 2003-04. So these regulations are likely to put a significant financial burden on families and deter people from taking on additional hours of employment, and yet may not in the end result in the overpayments being returned to the Treasury. This is a badly thought through plan that runs counter to the Government’s supposed aim of incentivising people to take up work.

We must understand that this is only a short-term fix. Universal credit, as the Minister has said, will replace tax credits in a few years. That is very welcome, since that system will do away with the need for disregard altogether—exactly the right approach to the overpayment problem. As universal credit comes in, the scored savings from the cutting of the disregard reduce significantly, so these regulations are likely to hit millions of people over the next few years to no long-term end. This is bad law, poorly justified by the Government and running counter to their own stated aims. That is the reason for my Motion to Regret. I beg to move.

[Lord Kirkwood of Kirkhope (LD)]

My Lords, I am delighted to be able to follow my noble friend. She has done the House a service this afternoon in raising this very important issue. It is particularly important for the Liberal Democrats because, in our reduced circumstances in the Commons, it was impossible for us as a group to take part in the debate on Thursday 3 March when these draft Tax Credits (Income Thresholds and Determination of Rates) (Amendment) Regulations 2016 were discussed in the Delegated Legislation Committee. Now, we have a straightforward and excellent statement of what the Liberal Democrats in Parliament think about these regulations, and my noble friend did a tremendous job in that regard.

We also owe her a debt because she brings in front of us a Treasury Minister who is a significant figure, not just because he is a Minister in the Treasury but because of his background. I hope that more than anything else this afternoon he will say to us straightforwardly that he is going to take an interest in these regulations. His name is now on them. He is an experienced hand, he understands statistics and he understands how processes of administration work, and I have some questions for him.

--- Later in debate ---

[Lord O’Neill of Gatley]

Let me respond to the two specific points made by the noble Baroness, Lady Manzoor. The first is linked to the question put by the noble Lord, Lord Tunnicliffe. As I said, there are a number of ways one could think of to make a rational response, and one of the reasons I hesitated to go down the path that the question sought to take me is that it is important that this be seen in the context of what is happening with universal credit. Rather than prejudging what is implicit in both questions, which is that the real-time information system will not succeed in the way we believe it will, I think we should give it a chance.

In response to the second point made by the noble Baroness, I suspect that a number of noble Lords will not be aware of something that is technically quite complicated; there may not be sufficient awareness of what we are trying to deal with here. The reason why the disregard is being put back to its original level is because there are people who receive a significant increase in their income where there is no consequence without it coming back down. That is why all members of the coalition were perfectly happy to reduce it so significantly at the start of the last Government.

[Lord Kirkwood of Kirkhope]

I appreciate that the Minister is trying to make progress, but I wonder if I could ask him a brief follow-up question to RTI. Is he confident that the new system which is to take effect in a few days’ time will be sufficiently sophisticated to disaggregate the data flows in the new system from the old system? Otherwise the overpayments that are overhanging the data at the moment will make it impossible for any statistical changes to be determined in the new system as opposed to the old, in terms of how successful or otherwise it might be.

[Lord O’Neill of Gatley]

My Lords, I have not personally studied the RTI system in enormous detail, but I am confident in our officials’ advice and guidance that the system has been sufficiently upgraded to enable us happily to undertake this policy initiative.