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

Lord Tunnicliffe Excerpts

Monday 7th March 2016 Lords Chamber

I finish by saying that the main worry I have—I referred to it earlier—revolves around the impetus for this going forward, which my noble friend correctly mentioned. We are trying to encourage people to trade themselves out of debt by getting more hours of work and higher pay, and we understand that the Government are attempting to assist that process. However, reading the IFS Green Budget 2016 for the upcoming Budget, it is quite clear to me that the people who are going to suffer most for the rest of this Parliament are the two deciles at the second and third points of the income distribution. That is exactly the 800,000 families that are going to be hit by this and exactly the kind of households and families that this Government want to support. I do not understand why we get this contradiction in policy, except to say that the Government, and, more accurately, the Chancellor, want £935 million as part of their £12,000 million reduction in the welfare budget. I hope that the Minister will go away and reflect carefully on this policy and give us a guarantee that it is not all going to fall over in three weeks’ time because the RTI computer process fails to function.

[Lord Tunnicliffe (Lab)]

My Lords, as has been outlined, the regulations before us today would reduce the tax credit income disregard from £5,000 to £2,500. We believe that it is right that we work towards developing a system which ensures that households do not incur tax credit overpayments. However, until such a point when real-time responsiveness can be guaranteed, it is surely justified that there is enough leeway in the system to reduce the shock of these overpayments and give households some time to readjust the family finances.

Thus far, the Government have failed to show that the system is resilient enough to cope with the reduction to the income disregard, having failed to provide your Lordships’ House with either an impact assessment or any evidence to support claims that the service mechanisms respond to real-time information. In inviting us to agree this order, surely the Government should have provided this information as a matter of course. In keeping with what I regard as standard practice, I would expect the Government to have produced an impact assessment to accompany these regulations, particularly in the light of public interest and your Lordships’ interest in this matter. However, that was not the case, and it was left to the Secondary Legislation Scrutiny Committee, to which we are indebted, to investigate further.

In responding to the committee’s questions, the Government admitted that this change will impact on 800,000 households next year—a figure which only adds to my disbelief as to why no assessment was produced. They also go on to say, without supporting evidence, that of the 800,000 people,

“none will be cash losers because their income will have increased”.

In the absence of further detail, the House of Commons Library has analysed the impact that the disregard reduction will have on a family’s income, and its findings directly contradict the claims made by the Government. The findings suggest, for example, that for a lone parent with two children the income disregard reduction could hit a household by as much as £1,000. Of course, this is just one scenario, but in the absence of any data to support the claim that there will be “no losers”, it certainly calls the claim into question.

There is also no explanation for why the Government have determined that halving the income disregard is appropriate. Why the £2,500 figure? Is it the average minimum salary increase of tax credit claimants assessed over previous years? Is it an amount that would provide an adequate cost-of-living buffer for those on the lowest salaries within the scheme? I would be very interested to hear the Government’s rationale. I hope that the Minister can give us some indication of why an impact assessment was absent as well as an assurance that, particularly in matters which attract such intense public interest, such documents will accompany future instruments.

I turn to the apparent improvements in tax credit delivery systems which the Government alluded to in their response to the Secondary Legislation Scrutiny Committee. It was suggested that it is now acceptable to return the disregard to the original level of 2003 because,

“the tax credit system is now operationally better able to cope … now that it has more up to date information on people’s earnings … HMRC are also making it easier to report changes quickly online, so that people will less often receive overpayments”.

Yet this is the third time since 2010 that the Government will have cut the income disregard and in every year since then the amount of overpayments has increased. That does not suggest to me that we have a system which can at present manage people’s changes in circumstance on a real-time basis. This cut will serve only to exacerbate such problems. That is not good for households which receive tax credits and nor is it good for our country’s public finances as a whole. Surely it would have been more sensible to wait for the introduction of universal credit, test the relevant systems and then explore the capacity of those systems to cope with real-time changes in people’s income.

These proposals have been poorly presented. I do not believe that the Government have given sufficient thought to how this reduction will impact on people who receive tax credits or given any consideration to how the mechanisms which process these claims will cope with the added demand. I hope that the Minister will make a serious attempt to address the specific points that I have raised and refrain from parroting the Treasury line that these measures will “make work pay”. As I have made clear, that has not been the focus of our concerns.

The Government must give assurances that a full impact assessment and evidence base will be provided for future instruments. I would be grateful if the Minister could also give a commitment to outline not only the ongoing improvements being made to the operational mechanisms used to calculate tax credits but what HMRC can do to help support those who receive overpayments. For example, where repayments are large, can they be spread over a number of years? Furthermore, can the Minister assure us that no unreasonable penalties will be levied against those who have been overpaid?

Your Lordships’ House has played its role in ensuring that full and effective scrutiny can take place, not only though this debate but, crucially, through the work of the Secondary Legislation Scrutiny Committee, which helped inform the discussion in the other place. I assure the Minister that we will watch developments in this area very carefully, as it is vital that we begin to see progress on addressing the overpayment of tax credits. Labour was well represented in the debate in the other place and made its position clear. The matter went to a vote and the Government succeeded. So the Government must now get on with ensuring that the real-time mechanisms live up to their promises.

In the coming weeks and months, I do not doubt that there will be issues on which we will have to go further than simply indicating our disapproval and will have to test the opinion of the House. However, it is our judgment as Her Majesty’s Official Opposition that today is not such an occasion.

[Lord O'Neill of Gatley]

My Lords, I thank those who have taken part so far in this debate. Each time that I have had the pleasure of standing here, I have always learned some interesting thoughts on whatever the topic is. I will try to respond to the things that I have heard as part of my closing statement. First, I will reiterate the broad framework.

This measure needs to be considered alongside the broader steps that the Government are taking, with their ambition for a higher-wage, lower-tax and lower-welfare society, which they were successfully elected to deliver in 2015. Under this proposal is the belief that work will always pay. In that regard, these regulations will reduce the degree of unfairness still persistent in the tax credit system. The reduction to the income rise disregard will reduce the instances where one family receives a higher tax credit award than another family with precisely the same income and the same circumstances. As I have already set out, it is also not unimportant to recall that this policy returns the income rise disregard to its original level.

With the introduction of real-time information, which each of the three speakers mentioned, the tax credits IT system is now more responsive and able to adjust to the fluctuations in family incomes in-year. I will return to that but, as the noble Lord, Lord Kirkwood, in particular mentioned, it is of course important that we try our best to monitor how that progresses. In the event that things do not turn out the way we expect, one would hope that a rational response would be to react accordingly. Before I come back to the specifics, it is also important to point out, as the noble Baroness, Lady Manzoor, herself said and other noble Lords touched on, that this is against the background where we are in any case migrating to universal credit. As part of that, a monthly system will be in operation and it is important to bear in mind that we are already in a position of travel. These new regulations reflect—

[Lord Tunnicliffe]

Will the Minister admit that the only possible rational response if the circumstances turn out as he has just described—and he promised a rational response—would be to return the disregard to the £5,000 level?

[Lord O'Neill of Gatley]

I am not sure that that would be the only rational response, but it would certainly be one of a number of ideas that one should consider in the event of any evidence that would subsequently accumulate as a result of the implementation of this regulation. Other policies could be thought of as well.