Welfare Reform Bill

Lord Sassoon Excerpts

Monday 14th November 2011 Grand Committee

Moved by

[Lord Sassoon]

86ZZZFA: After Clause 74, insert the following new Clause—
“Calculation of working tax credit
(1) Step 5 in regulation 7(3) of the 2002 Regulations has effect in relation to awards of working tax credit for the whole or part of the relevant year as if from the beginning of the day on 6 April 2011 the percentage to be applied under step 5 in finding the amount of the reduction were 41% (instead of 39%).
(2) Anything done by the Commissioners before the coming into force of this section in relation to awards of working tax credit for the whole or part of the relevant year is to be treated as having been duly done, if it would have been duly done but for being done on the basis that from the beginning of the day on 6 April 2011 the percentage to be applied under step 5 was 41%.
(3) In this section—
“the 2002 Regulations” means the Tax Credits (Income Thresholds and Determination of Rates) Regulations 2002 (S.I. 2002/2008);
“the Commissioners” means the Commissioners for Her Majesty’s Revenue and Customs;
“the relevant year” means the year beginning with 6 April 2011.”

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, the purpose of the government amendments in this group is to correct an omission in secondary legislation which was made to implement changes to the working tax credit withdrawal rate announced as part of the June 2010 Budget. I apologise for the fact that these amendments are required.

Any award of working tax credit or child tax credit is reduced or withdrawn by a prescribed rate for every pound of income that a claimant has above a specified threshold. One of the changes announced in my right honourable friend the Chancellor’s June 2010 Budget in relation to tax credits was to amend the withdrawal rate for both child tax credit and working tax credit. The intention for the tax year 2011-12 was that the withdrawal rate would be set at 41 per cent, so that for every pound of income above the threshold, the amount of tax credits payable would be reduced by 41p. HMRC accordingly amended the tax credits IT system and since 6 April 2011 has implemented the increase in the withdrawal rates for both working tax credits and child tax credits and thus has applied a withdrawal rate of 41 per cent in relation to both tax credits for 2011-12 awards. Although the secondary legislation was amended correctly for the child tax credit withdrawal rate, unfortunately the working tax credit withdrawal rate was not. This new clause will correct the technical omission and will ensure that the withdrawal rate for working tax credit from 6 April 2011 is 41 per cent and not 39 per cent.

Let me be very clear for the record. HMRC is paying claimants the right amount of money as announced in the June 2010 Budget. It is applying the 41 per withdrawal rate and has been since 6 April 2011. In practical terms, the implementation of this correction will not impact tax credit claimants as it simply aligns the legislation with the announced and currently effective practice. I beg to move.

[Baroness Hollis of Heigham]

Does that mean that as a result we have been paying people less than they were entitled to by law and are retrospectively correcting that?

[Lord Sassoon]

My Lords, claimants are being paid what they expected to be paid based on the announcement made by my right honourable friend the Chancellor in the June 2010 Budget. If the legislation goes uncorrected, HMRC will be paying at a rate that is not covered by the law, so it is necessary to amend the legislation to bring into alignment the law and what claimants expected to receive and are receiving.

[Baroness Hollis of Heigham]

So I think the answer to my question is yes. In other words, between April and December, HMRC has been withdrawing money at a taper that was not legitimised by legislation?

[Lord Sassoon]

My Lords, there are a lot of things where HMRC starts in practice, and the law, whether primary or secondary legislation, comes afterwards. If the law does not come in, adjustments will subsequently have to be made. The result of doing this now is that there will be no adjustments and people will have been paid what it was intended they be paid.

[Baroness Hollis of Heigham]

My Lords, I will not say that the noble Lord is wriggling—I am looking for a more courteous word—but it is something like that. He keeps saying, “If we didn’t do this, it would get worse”. That is quite right. However, will he not confirm that between April and December he has withdrawn money at a rate not approved, legitimised, permitted or allowed by legislation?

[Lord Sassoon]

Clearly—

[Baroness Hollis of Heigham]

Could we have a yes or no?

[Lord Sassoon]

As the law stands, HMRC is giving people less money than the law says that it should.

[Baroness Hollis of Heigham]

Thank you.

--- Later in debate ---

[Lord McAvoy]

My Lords, perhaps the Minister could answer another question. It might be a bit pedantic, but in a litigious world things can happen. Can he assure us that the Government are not liable to be sued in the courts for behaving outwith the law?

[Lord Sassoon]

I do not believe that there is any question of the Government being sued. The matter is clearly regrettable. The error was not spotted by anybody either inside or outside HMRC until August, when a technician in HMRC spotted it. It was not spotted by any of the numerous parties who no doubt crawled over this technical area, and it is now being corrected at the earliest practical time. Therefore, there is no question of the Government being sued by anybody—but it is important that we correct the technical error.

[Lord Wigley]

I thank the Minister for that answer, but I will pursue one point. He made the point that nobody spotted this—including, by implication, opposition Members. Nevertheless, it is not opposition Members who are running HMRC. Has any disciplinary action been implemented over this mistake?

[Lord Sassoon]

My Lords, if the technician who spotted it was not part of the original drafting, he or she is to be congratulated. I was not making a point about the Opposition; I was merely pointing out that this is a highly technical area that escaped everybody's notice for a considerable amount of time. What is going on now is that HMRC has introduced new procedures to make sure that the checking process that it will go through for these things in future will mean that there will be a significantly reduced chance of anything like this slipping through again.

[Lord Wigley]

My Lords, will the Minister confirm that people who had an entitlement under the law as it stood will be paid fully in accordance with the law as it stood, and that there is no question of a clawback coming through retrospective legislation?

[Baroness Hollis of Heigham]

It is worse than that. Money has been taken from people. The thrust of the noble Lord’s argument suggests that it should be repaid until it has been appropriately legitimised.

[Lord Sassoon]

It is certainly the case that if the law were not brought into line with what the Chancellor intended, at some point HMRC would have to make adjustments to the incorrect clawbacks that were calculated. We can discuss this for as long as we want. The fact is that there was a clear policy announcement. It should have gone through in the original statutory instrument—I think it was 2011/1035—and a claimant can at any stage ask for an appeal and ask to have their payments recalculated. However, clearly it would be pointless to do so if they expect that the amendment we are now debating will be agreed and will get the position back to where it ought to have been all along.

[Lord Touhig]

My Lords, I am not clear on this. Are the Government saying that people who had money taken from them that should not have been taken are not going to have it given back to them? The Government have acted outside the law. People have been disadvantaged. Is it the Government’s intention to give back to these people the money that they were entitled to, as the law specifies?

[Lord Sassoon]

The technical position is that what is paid during the year is only an interim award. Of course, HMRC seeks to pay all entitlements on a correct basis. However, the final calculation is done at the end of the tax year. Therefore, at the moment HMRC is quite properly paying what it believes will be the position once we get the legislation lined up with the original policy intention.

[Baroness Hollis of Heigham]

My Lords, if the tax system changes half way through the year, we do not say that it is retrospectively applied to the previous six months and rely on an end-of-year adjustment, which is what the noble Lord seems to be doing. He has illegally underpaid people for something like nine months. The fact that tax credits are done at the end of the year and as an adjustment is neither here nor there. For that period he has illegally underpaid and he cannot retrospectively go back and claim money from them which he was not entitled to do.

[Lord Sassoon]

My Lords, as I understand it that is not the position. The position for all taxpayers and claimants has to be finally calculated at the end of the year—and in many circumstances it can be done only then—because all sorts of circumstances may have changed. The issue is to get the legislation right in respect of this tax year. HMRC has calculated everything to date on the basis that there will be no further adjustments required at the end of the tax year once we get the legislation back into alignment with what was originally intended.

I appreciate the intention of noble Lords opposite to make hay out of this. It was a technical error in a statutory instrument that should not have happened. The amendment we are considering today is not to change anything midway through the year but to change the law with effect from 6 April 2011. There is going to be no unfairness and everything will be in line with exactly what my right honourable friend the Chancellor announced in the first place.

[Lord Touhig]

Make hay, my Lords? Some of the poorest people in this country have been denied the support they are entitled to. Is it true at 3.40 on a Monday afternoon we have a government Minister coming to Parliament and saying they are going to be denied the money that Parliament says they should have? Is that the case? Let us have a straight yes or no. Will these people get the money the law says they should have if we agree this amendment today?

[Lord Sassoon]

My Lords, nobody is being misled because the Chancellor of the Exchequer made the position extremely clear in his original Budget Statement. People have had their calculations made on the basis of the Statement by the Chancellor. What we are doing today is part of the process of getting the law into alignment with that to make absolutely sure that people are paid precisely what was announced in the June 2010 Budget.

[Lord McKenzie of Luton]

My Lords, I was going to start by welcoming the noble Lord, Lord Sassoon, to our Committee deliberations, which I now do a little belatedly. It seems to me that the proposition we are hearing today is that you collect the tax you want and then you align the legislation with it in due course. Does the Minister differentiate in his analysis between those who still have a claim that is continuing and those whose claim might have ceased during the course of the year for one reason or another?

I want to ask one or two further questions. In terms of the increase in the tax credit withdrawal rate, has any assessment been made of the impact of that on work incentives? Can the Minister also say something about the distributional impact of that reduction? It may seem just a small adjustment from 39 per cent to 41 per cent but the Red Book for the period shows that the impact in the first year would be £645 million increasing to more than £700 million throughout the rest of the CSR period. These are not small sums of money we are dealing with here in this rather retrospective manner.

In terms of the impact of those sums, the budget line sits on the same page as an item we are just about to discuss in relation to the disability living allowance. On the same line are the savings the Government are planning to make to a reform of the gateway which is something like double the savings they are making from these changes to the tax credits. Can the Minister perhaps just say something about that juxtaposition and the relative position of the two adjustments?

[Baroness Hollis of Heigham]

He is of course speaking for the whole Government.

[Lord Sassoon]

My Lords, I always speak for the whole Government, of course. The first point is to re-emphasise that we are talking about an adjustment that will apply, as was always intended, from the beginning of this tax year—6 April 2011—so the issues of what happens to people whose circumstances change during the middle of the year are not relevant. The policy was announced as taking effect for the tax year 2011-12, which is precisely what the amendments are intended to achieve.

There is nothing magic about the amount of money and the juxtaposition. I know that June 2010 seems a while ago now but this was the emergency Budget in which we needed to do a number of things, not least set out a very clear plan to deal with the inherited deficit.

[Noble Lords]

Oh no!

[Lord Sassoon]

It is important that we are reminded of that. This change to the withdrawal rate was one of a significant number of changes that the Treasury and my right honourable friend the Chancellor had to make to start to get the books back into balance—the start of a five-year process to get us back into balance. That is where the change comes from, and it is part of a wider reform thrust, which is the subject of a lot of the wider debate in this Committee. It was part of the overall approach to dealing with the deficit in a fair and targeted way. The noble Lord asks about the distributional impact. Of course, with the June 2010 Budget it was the first time that the Government put into the documents a complete distributional impact of the tax changes. It would be wrong to pick out the distributional impact of an individual measure like this. For the first time the Budget document gave the overall distributional impact, of which this withdrawal is just one element. It should be considered alongside other changes in personal allowance, which will boost work incentives. Again, it would be wrong to take this in isolation but it is important to remember that this was part of a complex construct.

[Lord Boswell of Aynho]

My Lords, will my noble friend reflect, in conjunction with our noble friend his colleague, that in a sense—I have enjoyed watching the passing scene on this matter—he has been rescued by the fact that the concept of income tax is a tax from year to year and has a defined period in which adjustments can be made? But I understand that under the universal credit, the payment period will be somewhat different and the ability to use that kind of argument, if there were a miscalculation of the taper rate in the future, would not be available? That is perhaps the moral that Ministers and officials will need to take into account in avoiding any slip-ups in the future.

--- Later in debate ---

[Lord McKenzie of Luton]

Before the Minister responds to that, perhaps I may add to the list of questions. A moment ago he said that these were fair and targeted proposals, but can he expand on that proposition for us? The increase in the taper rate that affects some people runs to the tune of £780 million and the disability living allowance changes to the gateway amount to a withdrawal amounts to £1.4 billion from disabled people. How does he deal with that juxtaposition? How does he evaluate it? What is the basis for saying that those are fair and targeted? The Minister said it is always right to remind us about the inherited deficit. Perhaps I could say that it is always right to remind Members opposite that a financial crisis has hit every economy around the world—certainly all the major economies; when the last Government left office, the economy was growing and unemployment was going down.

[Lord Sassoon]

Perhaps it is worth saying that in future HM Treasury will be making a prospective provision for subsequent years by making new uprating regulations in time for the tax year 2012-13. So, just to be clear, this subsection will operate from the day it comes into force, but relates to this year; something different will happen next year. We will have the regulations in good time. I do not want to prolong things by discussing accidents that might have happened under the previous Government. I am sure there is a long list of things that went wrong; we know that there are significant things that have gone wrong in the administration of tax over the years. As for the distributional point, the critical thing is that with the entire package of tax decisions we took last year— and again it was repeated in the Budget document this year—we look at the effects of the measures quintile by quintile. The critical test here is that we have made sure that when all the measures and decisions taken by this Government are taken together, those who can afford to pay most pay most. So again—

[Lord McKenzie of Luton]

Does the Minister reject the IFS analysis that the tax and benefit changes that this Government have introduced will lead to an increase in both absolute poverty and relative poverty—both in children and in adults?

[Lord Sassoon]

My Lords, I think we are going much further than this individual measure. This measure is part of a much wider construct, which is not the subject of the amendment today. The amendment today is merely to get the position in line with what the IFS, the OBR and all other commentators believe to be the position

Without prolonging the point about the IFS, the IFS absolutely confirms the point I was just making: it is the richest in our society who will be paying the most as a result of the measures that we have taken, both in the budgets and in the spending review.

[Lord McKenzie of Luton]

I think we have pressed the Minister enough on this. We ought to let him go, but I do wish that he will return for some further deliberations before we finish this Committee stage.