Orders of the Day — Tax Credits Bill

House of Commons, 7 February 2002.

New Clause 1 — Recipients of children's tax credit prior to April 2003

Steve Webb (Liberal Democrat, Northavon)

I beg to move, That the clause be read a Second time.

Alan Haselhurst (Deputy Speaker, Saffron Walden)

With this it will be convenient to consider the following: New clause 4—Effect of working tax credit on housing or council tax benefits—

'No award of working tax credit under this Act shall be taken into account in the determination of any housing or council tax benefit to which a person may be entitled under any other enactment.'.

New clause 7—Access to social fund—

'Before the coming into effect of this Act, the Secretary of State shall lay before Parliament regulations providing for the conditions and qualifications for access to the social fund of persons ceasing to qualify for income support or income based job seekers allowance upon the coming into effect of this Act.'.

New Clause 8—Access to passported benefits—

'Before the coming into effect of this Act, the Secretary of State shall lay before Parliament regulations providing for the conditions and qualifications for access to passported benefits provided by the Secretary of State, devolved administrations and local authorities which prior to the coming into effect of this Act had been afforded by qualifying for working families tax credit, income support or income–based jobseeker's allowance.'.

Amendment No. 1, in clause 1, page 1, line 12 at end insert—

'(subject to the exception provided in section (Recipients of children's tax credit prior to April 2003))'.

Amendment No. 5, in clause 60, page 32, line 25, at end insert—

'(except for regulations made under section (Access to social fund) or section (Access to passported benefits).'.

Steve Webb (Liberal Democrat, Northavon)

It is my pleasure to speak to new clause 1. We also support new clause 4. I shall not comment on new clauses 7 and 8—they will be discussed by the Conservative Members who tabled them—other than to note that they raise important issues and we are sympathetic to their intention. We look forward to hearing more about them in due course.

During our deliberations in the Standing Committee, a certain amount of ping-pong took place between the two sides. We wanted to give the Paymaster General the opportunity to set out her thinking on the rates and structure of the tax credits, but she declined to do so. Lest the hon. Lady be under any misapprehension, new clause 1 is different altogether. It does not relate to new claimants of the tax credit who start to become entitled—for example, due to the birth of a child—after April 2003; it relates to the rules that will govern the existing recipients of that tax credit.

The new clause would mean that people receiving tax credits before April 2003 were not cash losers due to the transition. They would be able to continue with the same cash receipt of tax credit for as long as they still had a dependent child, or a qualifying young person.

Obviously, the Chancellor will have to make decisions about the rates and thresholds of the tax credit in his Budget statement. We are not trying to pre-empt that. The acceptance of the new clause would not prejudge any of those decisions. It is really a statement of the principle that people who currently receive the tax credit should not be cash losers—whatever the Chancellor's decision as to the rates and thresholds.

I shall give the House an example, as otherwise we might assume that—in a rare lapse—the Liberal Democrats were defending the rich while the Conservatives were talking about the social fund. The families that I am talking about are not necessarily filthy rich.

I take the example, which I believe to be a good one, of a couple, both of whom work full-time—one on the typical salary for a nurse, one on the typical salary for a teacher. At present they receive the full child tax credit of £520. It seems almost inconceivable that, assessed on their joint income, they would receive anything other than zero. If a family of that sort received child tax credit, so would Back-Bench Members of Parliament. If, having decided to introduce a taper that withdraws child tax credit from higher earners, we include Back-Bench Members of Parliament among those who receive it, there is not much point in having a taper. Therefore, without going into details on the exact rates and thresholds that the Chancellor will choose, there is bound to be a doubt in the minds of families such as the nurse married to the teacher that they may be about to lose some, or all, of the £520 a year that they currently receive.

More than one or two families are in that position. If the thresholds remain the same, 900,000 families could lose all of their tax credit, and another 500,000 could lose some of it. The purpose of the new clause is to tell them, "You may be reassured. Although you might not get an increase, we offer you our assurance as a House today that, whatever rates and thresholds the Chancellor introduces, you will not be cash losers."

One might ask, why should not those families be cash losers? If a new system is introduced that is less generous to people in those circumstances, why should they not lose? We must remember that the children's tax credit was the successor to the married couples tax allowance, so we had a year when that allowance was abolished and nothing took its place, and we shall have had at least two years of the children's tax credit, now payable at £520 a year. It is reasonable to suppose that families have got used to budgeting on the basis of that income, and £520 is quite a serious sum of money. All that we are asking the House to agree is that such families may continue to receive that amount at that cash level. It would not be inflation-proofed, but they would be protected from a windfall loss of up to £520.

Unless the Chancellor wants to create 1.4 million losers, he will have to spend some money on that issue anyway—perhaps by raising the threshold or changing the taper. We are not prejudging that decision, but we are proposing a relatively cheap solution, as is our wont, because the only group that we are protecting consists of existing recipients, who gradually fade out of the system. An existing recipient with a 16-year-old child and nothing else gets the money for one year, and that is it.

If we were arguing that the Government should be raising the threshold so that new recipients in the same circumstances received the full tax credit, that increased cost would roll on indefinitely in the system. Our proposal is a transitional measure, not one for new claimants, because arguably a new family—the nurse married to the teacher who then has the first baby—has never budgeted on the basis of that sum of money and has never got used to having it, so that family's not having it through a new system is defensible. However, taking the money away from people who have got used to having it is far less defensible. Ours is a very modest proposal, to protect existing recipients and to make a statement of principle that there should be no cash losers, without prejudice to any decision that the Chancellor might take about raising thresholds.

I shall briefly address new clause 4. Here there are interesting parallels between the Tax Credits Bill and the State Pension Credit Bill. In the case of the latter Bill, which is passing through another place, the Government have decided that any gains that are given to people through the credit should not be taken from them by means of tapers on housing benefit and council tax benefit, but the Government have not offered us those assurances in the case of tax credits—quite the contrary.

There is some suggestion that a person who gets tax credits through the Tax Credits Bill will then potentially have some or most of them taken away as a result of the tapers on housing benefit and council tax benefit. Several London Members, who served on the Committee with us, expressed concern that because, in view of high rents, people can be on housing benefit while having relatively high incomes, those people could lose 65p—perhaps 85p—in the pound of the money that the Government want to give them.

If the purpose of the Bill is to reward work, to encourage people to work and to teach that work pays, it is dishonest to give them money through the pay packet so that they get a high take-home pay figure and then allow the local authority to come along and take 85 per cent. of it from them. That seems counter-productive in terms of the Government's objectives. We therefore consider that new clause 4 is helpful to the Government—just as we have been in tabling many of our amendments—by enabling those whom they intend to benefit from the tax credits to keep the money, instead of having to give it to someone else.

Hywel Williams (Plaid Cymru, Caernarfon)

Does the hon. Gentleman realise that the point that he is discussing merely replicates the very worst aspects of the previous system and that that is a disincentive to returning to work, not only in London but in constituencies such as mine where many people claim the working families tax credit, are paid low wages and are in part-time or short-time work?

Steve Webb (Liberal Democrat, Northavon)

I am grateful to the hon. Gentleman for that intervention. Although high rents and council taxes in London are important, the issue is more about the interaction between high housing costs, high local taxes and low wages. Where all those factors combine, the problem will be particularly acute.

The principle of what we want to achieve under new clause 4 is relatively straightforward. We are sure that the Government want to encourage people to take the low-paid jobs that are available, but if the money that the Government give them is taken away from them partly or wholly because of another benefit system, that goes against what the Government want to achieve. We seek to protect existing claimants and to help the Government achieve their goals of encouraging low-paid work, and we believe that new clauses 1 and 4 would help to achieve those objectives.

Howard Flight (Conservative, Arundel and South Downs)

This group of new clauses and amendments essentially covers territory that there was insufficient time to cover in Committee. Yet again, that is evidence of the unsatisfactory nature of Bill programming.

Amendment No. 1, tabled by the Liberal Democrats, raises an important point of principle and, as has been stated, it grandfathers claimants' benefits under the existing children's tax credit. It was the consistent policy of Conservative Governments in changing social welfare, in essence, to grandfather existing claimants and to ensure that people were not disadvantaged by legislative changes. Therefore, amendment No. 1 is, in part, a probing amendment—it is important for the House to know what the Government intend to do. As the hon. Member for Northavon (Mr. Webb) said, the intention is not to discover what the rates will be across the board, but to address a point of principle, so I look forward to hearing what the Paymaster General has to say.

New clauses 7 and 8, with amendment No. 5, broadly address overlapping territory. Under new clause 4, the Liberal Democrats would apply a disregard principle, designed to address problems that arise in areas where housing is expensive, such as London. Under new clauses 7 and 8, we raise a much wider issue. The Bill does not explicitly state how passporting to the social fund and the various other crucial benefits—housing benefits, school meal benefits and council tax benefits—will be dealt with as a result of ending income support and income-based jobseeker's allowance, which provided crucial passports to qualify for those benefits.

The Bill therefore leaves major uncertainties about the arrangements for people who are presently passported by the existing qualifications under the working families tax credit, disabled person's tax credit, income support and jobseeker's allowance. The Bill will float some families off income support and income-based jobseeker's allowance, and they will lose access to the social fund unless specific provisions are made.

We want the Government to set out what their proposals are, as they should have done in the first place in the Bill. Perhaps those proposals will be satisfactory, but, unless that issue is properly addressed, the House should divide on the new clause because the most needy in society will face a major flaw if the issue is not addressed.

Dawn Primarolo (Labour, Bristol South)

Notwithstanding the fact that the hon. Member for Arundel and South Downs (Mr. Flight) has already declared that he intends to vote for the new clause before he has even heard what I have to say—I shall endeavour to be my normal persuasive self—several important issues are raised in this group of new clauses and amendments, and I should like briefly to deal with each principle. The hon. Member for Northavon (Mr. Webb) has moved a new clause that deals with one set of changes, but the hon. Gentlemen have spoken about something unconnected to the new clauses and amendments that they have tabled. That causes some difficulty, but let me give an explanation.

This group of new clauses and amendments deals with the relationship between the new tax credits and the existing forms of support. They cover three main issues—the children's tax credit, the interaction with housing and council tax benefits, and the passporting issue. I want to deal with each issue in turn because they are very important, as the hon. Gentlemen have said.

In speaking to new clause 1 and amendment No. 1, the hon. Member for Northavon returns to a point that we considered in Committee, even though he tries to explain that he is not doing so. I disappointed him in Committee, and I am afraid I shall do so again now. In dealing with what he claimed was a principle, he suggested some solutions. He said that the Chancellor could let thresholds remain the same, or he could change the threshold to address the point that the hon. Gentleman was making. As I have repeatedly said, the rates and tapers will be announced in the Budget by my right hon. Friend the Chancellor of the Exchequer.

New clause 1 refers to the children's tax credit and to people who are currently entitled to it. Under that new clause, the hon. Gentleman continues to try to extract a commitment from the Government about how a particular group of people may be affected. He then tries to extrapolate from that the type of decisions that my right hon. Friend the Chancellor will want to announce in his Budget statement.

The children's tax credit was one of a series of measures that we introduced in the previous Parliament to improve support for families with children. The measures that we introduced in our first term in office were constrained, as was the working families tax credit, by the system that then existed. The children's tax credit works in the framework imposed by independent taxation. It is therefore based on individual claimants and their individual incomes. That territory is fairly well understood in the House. The children's tax credit had to work in that way because of the income tax system.

One of the consequences of that has been that couples with the same aggregate income may receive different amounts of the children's tax credit, depending on how the income is distributed between them. Hon. Members and organisations have lobbied us extensively to tell us that that simply was not fair and that we needed to address it. That issue has been addressed in the child tax credit, and the hon. Gentleman would like me to tell him exactly how the rates and tapers will affect people as they transfer, but I am not about to do so. I have not seen any serious suggestion that the Government are at fault in trying to resolve that difficulty.

The formal announcements on the rates and tapers and on when the new tax credits will be introduced will be made in the Budget statement. I confirm yet again that that will happen in the Chancellor's Budget statement on 17 April and that we are planning a start in April 2003.

When setting the rates and thresholds, due consideration will be given to the relevant factors. My right hon. Friend will take those into account. As I said to the hon. Gentleman, the outline is in the Bill, but asking for specific undertakings on different sections of the population that will receive the tax credits is another attempt to debate rates and tapers. I know that he is keen to have that debate; so am I, and I look forward to engaging in it when the Chancellor makes his announcement. I hope that the hon. Gentleman's cold is not so bad that it restricts him from participating then.

Steve Webb (Liberal Democrat, Northavon)

New clause 1 is devised to allow us to request an assurance that there will be no cash losers among existing recipients. The Chancellor can set any rates or thresholds that he likes for people who come into the system or who continue in it, but do the Government believe that, no matter what those are, the principle of no cash losers is at stake? It seems that the Minister wants to keep cash losses on the table.

Dawn Primarolo (Labour, Bristol South)

I am not going to help the hon. Gentleman to make his points about whether there are losers in the transition to the new tax credits, which he made in the press. As I said to him and to other Committee members and Members of the House, it is clear that the Chancellor will take all considerations into his calculations. Thresholds and tapers, which will influence all those who transfer into the new tax credits, will be announced in the Budget statement. The hon. Gentleman is trying to crack open that debate now so that he can continue to advance the arguments that he made in the press. I understand why he wants to do that as an Opposition Member. However, he will understand, because I have said this to him so often, that the Chancellor will make the announcement in the Budget statement.

Howard Flight (Conservative, Arundel and South Downs)

Is the Paymaster General aware of the principle of Newton's law, named after Tony Newton? It clearly established that there should be no cash losers when welfare benefits change. For the record, the Minister is saying that this Government do not follow that principle.

Dawn Primarolo (Labour, Bristol South)

That is not the Newton's law that immediately came to my mind. If you will excuse the pun, Mr. Deputy Speaker, this is a fruitless debate. All hon. Members know that rates and tapers are the subject of the Budget announcement by my right hon. Friend the Chancellor. The Bill and our debates on it have been widely welcomed by everyone who is concerned about simplicity and transparency and about ensuring that families on the lowest incomes get the most support from our policies to tackle child poverty.

New clause 4 deals with the interaction of the working tax credit with housing benefit and council tax benefit. It would prevent the working tax credit from being taken into account in assessing entitlement to either of those benefits and would mean that people in work had a higher entitlement to benefits. I am not sure that that would produce the bed of roses that the hon. Member for Northavon might suppose.

Of primary importance to any family or individual is the overall package of support that they receive if they are in low-income work. A family with children could receive a combination of child benefit, child tax credit, working tax credit and housing and council tax benefits on top of their earnings. The Government are committed to ensuring that the overall package provides sufficient incentives for families to move into work and, once they are working, to increase their earnings.

The hon. Gentleman is well versed in the interactions of tapers and their effects on incentives to move into work. A key factor is the effect of the interaction of the various elements of the package on overall withdrawal rates. I know that the hon. Gentleman and many of my hon. Friends are concerned about the impact of that on rental costs in some parts of the country. It might help if I outline the effect of the new clause on the current system because it does not deliver what the hon. Gentleman wants.

If the working families tax credit were not taken into account in housing benefit and council tax benefit, the combined withdrawal rates of the two credits would increase significantly, producing a total withdrawal rate of around 125 per cent., so people would be worse off for working harder. The underlying principles, if not the precise numbers, are the same for the working tax credit as they are for the working families tax credit and the disabled person's tax credit.

The Government are committed to improving work incentives. I understand the hon. Gentleman's concern about areas with high rents. We have discussed that in the context of housing benefit, and the Department for Work and Pensions is considering the problem. Far from improving things, new clause 4 would cut across the work that we are doing to ensure that people are better off in work. In addition, its effects would not be well targeted, so not only would it result in a withdrawal rate of 125 per cent. but the targeting would cause problems. Housing benefit and council tax benefit are withdrawn as incomes increase, ensuring that those on the lowest incomes get the most support. Apart from a small disregard, net earnings are taken fully into account in housing and council tax benefits. It would not make any sense to treat the working tax credit, which is designed to boost net earnings, more favourably than earnings themselves.

New clause 4 would not work. Indeed, it would make things worse. The debate allows the hon. Gentleman to highlight the interaction between high-rent areas and housing benefit payments. None the less, the new clause would destroy all the work incentives and the possibilities offered by the working tax credit. That might be his intention; I know that he is not a fan of the working tax credit. However, the new clause does not impress its virtues on the Government.

I am trying to explain the Government's intentions and how we view the interaction between benefits and the new tax credit. The interaction is especially important when we consider the passporting of benefits, which is dealt with in new clauses 7 and 8.

New clauses 7 and 8 set out to probe the Government's intentions regarding entitlement to what are commonly known as the passported benefits—benefits provided by other Government Departments, for example, free school meals provided by the Department for Education and Skills, and free prescriptions and dental treatment provided by Department of Health. Those benefits, and many more besides, use entitlement to certain key social security benefits and tax credits as a peg in decisions on who should get access to them, as a way to reduce the administration and difficulties involved in making sure that benefits get through.

Passported benefits remain the responsibility of the administering Departments, not of the Treasury; it is for those Departments to set the rules for entitlement and decide what level of income brings a family into entitlement. For those reasons, it is inappropriate to legislate for other Government Departments in the Bill, even though the Bill gives powers to provide information to the other Departments to undertake passporting.

The key issues in passporting are, as the hon. Member for Arundel and South Downs mentioned, those who are floated off income support or income-based jobseeker's allowance when the child elements of those benefits are removed, and what we do to ensure that people who had passported benefits continue to receive them in the new tax credits. The latest estimates suggest that about 70,000 families, out of a total 1.3 million currently receiving income support or jobseeker's allowance, will no longer receive the benefits as a result of the changes. Naturally, we are anxious to ensure that their entitlements are protected.

The Department for Work and Pensions will make proposals on how those families will be treated in due course, once the rates, tapers and income rules have been determined. Families that are floated off will be contacted well in advance by that Department and offered an interview; they will be provided with all the details and with help to secure their position.

In previous discussions, hon. Members have asked about entitlement to free school meals and free milk for the young children—the so-called welfare foods scheme—of those floated off income support and income-based jobseeker's allowance. They are two specific issues on which I can offer more detail on the Government's thinking.

On 24 January, my hon. Friend the Minister for School Standards made it clear to the Committee considering the Education Bill that the Government intend to put in place measures to guarantee that those who are floated off income support or income-based jobseeker's allowance because of the introduction of the new tax credits will not lose their access to free school meals—they will be protected. Today, I can confirm that similar arrangements will be put in place to maintain that group's entitlements to the welfare foods category of benefits.

I am trying to reassure the House that those who are currently passported to certain benefits will continue to be passported on the same basis as now. It is necessary that the Government Departments involved develop new regulations using the new tax credits to ensure that there is no loss. I am confident that that will be achieved.

I hope that in the light of my explanation of how the amendments are technically flawed and would make matters worse, and my reassurances about passported benefits, together with the fact that I am not persuaded to make today an announcement on rates and tapers that my right hon. Friend the Chancellor is due to make in his Budget statement, the amendments and new clauses will be withdrawn. If they are pressed to a vote, regrettably I shall have to recommend to my right hon. and hon. Friends that they oppose them in the Lobby.

Howard Flight (Conservative, Arundel and South Downs)

rose—

Alan Haselhurst (Deputy Speaker, Saffron Walden)

Order. The hon. Gentleman cannot speak again. Only the mover of the lead new clause can do so.

Steve Webb (Liberal Democrat, Northavon)

I am grateful to the Paymaster General for putting on the record some of the issues that we had no time to discuss in Committee, especially those relating to passporting. The hon. Member for Arundel and South Downs (Mr. Flight) can decide for himself whether or not he is satisfied with the hon. Lady's response.

Taking our new clauses in reverse order, I accept the Paymaster General's explanation of new clause 4's effect on the marginal tax rate. I would go so far as to say that I made a mistake—that is not the effect intended. However, she did not satisfy us on the principle. Her colleagues in the Department for Work and Pensions were prepared to say in respect of pension credit that they will put up housing benefit thresholds to ensure that the benefit of the credit gets through. That credit is not due to start until October 2003. That Department is prepared to assure people that it will adjust rates and thresholds to ensure that they will get the benefit 18 months or so down the line, but the Paymaster General is not prepared to assure them that what they are given with one hand through the working tax credit will not be taken away with the other through housing benefit even 12 months down the line.

Whatever the merits of the new clause, the Paymaster General might have offered us some reassurance. The issue of high housing costs can only be addressed with reference to the effects on the housing benefit system, because the only way to identify those who have the combination of low income and high housing costs is through housing benefit. The hon. Lady said that the new clause would not deal with the problem, but did not say what would. I think that she recognises there is a problem, but she gave no sense that the Government intend to deal with it, nor any indication of how they might do so. We are disappointed by the Government's response to new clause 4, which, although it would not achieve what we intended, at least raises the issue.

It is interesting to compare the Paymaster General's response on passported benefits to her response on continued entitlement to the children's tax credit. On passported benefits, she gave an assurance that there would be no losers—people getting free school meals now will get them in future—but there was no such assurance on the children's tax credit: that will be dealt with in the Budget. What is the difference of principle between the two? [Interruption.] None—it is decent of the hon. Lady to say that. After all, I have admitted that I was wrong.

People are getting credits now and they want an assurance that they will continue to do so in future. We are delighted by the assurance that free school meals will be carried over; why can we not have a similar assurance on the children's tax credit? As the hon. Member for Arundel and South Downs said, when structural changes are made there tends to be a principle whereby attempts are made to avoid cash losers. People then work their way through the system and inflation does its bit, but people are protected when changes are made.

Whatever rates and thresholds the Chancellor chooses—we are not trying to pre-empt his decision—we seek an assurance today that those who currently receive money will be protected and that there is a principle of no cash losers at work. However, the Paymaster General has reserved the option, in effect saying that she wants to leave for the Chancellor in the Budget the discretion not merely to set the rates and thresholds that he wants to set, but to take some or all of the £520 a year that those hard-working families are getting.

My hon. Friends and I are concerned that the Chancellor wants to reserve that option. We therefore want to test the opinion of the House.

New Clause 2 — Means of payment of tax credits to recipients

David Heath (Liberal Democrat, Somerton and Frome)

I beg to move, That the clause be read a Second time.

Alan Haselhurst (Deputy Speaker, Saffron Walden)

With this it will be convenient to take the following amendments: No. 15, in page 16, line 20, at beginning insert—

'Subject to section (Means of payment of tax credits to recipients)'.

No. 13, in page 16, line 30, at end insert—

'subject to employers consulting with their employees as to whether they would prefer working tax credit payments to be made by the Board directly.'.

No. 16, in page 16, line 30, at end insert—

'(1A) Regulations under this section shall not apply to an employer with fewer than 15 employees'.

No. 14, in page 17, line 42, at end insert—

'(8) The Board will refund to employers their costs incurred in making payments of working tax credit to employees.

(9) No employer with 20 or fewer employees will be bound by the regulations set out in this section.'.

David Heath (Liberal Democrat, Somerton and Frome)

Amendments Nos. 15 and 16 were tabled by the Liberal Democrats. Should my hon. Friend the Member for Teignbridge (Richard Younger–Ross) catch your eye later in the debate, Mr. Deputy Speaker, he will speak to amendment No. 16. Amendment No. 15 is simply a paving amendment for new clause 2.

The new clause deals with the payment of tax credits through the sub-post office system. It is a great delight to engage the attention of yet another Department on the matter of sub-post offices, as we are already talking simultaneously to two Departments. Nothing would please me more than if the new clause were to be unnecessary when events reach their conclusion next year.

We greatly welcomed the performance and innovation unit report and its comments on the universal banking service. We hope that it will be put in place satisfactorily, but we do not share the Government's confidence that that will necessarily be the case. In that view, we have allies, not least the National Federation of Sub-Postmasters, which has serious concerns about the readiness of the Government systems to implement what the NFSP sees as an important part of the strategy for the future survival and development of the sub-post office system. As we know—I will not go into a long history of sub-post offices, as that would be unnecessary to the prosecution of the argument for the new clause—

Alan Haselhurst (Deputy Speaker, Saffron Walden)

Order. That would not only be unnecessary, but it might take us outside the scope of the discussion that we should be having.

David Heath (Liberal Democrat, Somerton and Frome)

Absolutely right, Mr. Deputy Speaker. I obviously phrased my comment badly. I meant to say that to widen the scope to include the history of sub-post offices would be inappropriate to the debate. However, to deal specifically with the payment systems within sub-post offices, which is the substance of the new clause, is necessary.

As we know, three forms of bank account are to be offered by sub-post offices. I need to deal with only two: the basic bank account, which will provide basic banking services through the clearing banks but situated in the sub-post offices, and the Post Office card account. That baseline provision is the most critical element. It is designed for those who have not had or do not want a bank account, but still need to receive their benefits through the sub-post office system, and for whom we would suggest that the tax credit is also a relevant factor.

The Government were tardy in getting arrangements under way for that basic payment system. There seems to have been almost no progress under the aegis of the Department of Trade and Industry. Perhaps for that reason some rattling of the cages was necessary in autumn last year, when the Secretary of State for Work and Pensions was appointed as a sort of universal bank tsar. We know that, last October, the contracts had not been placed with the companies that were to put in the infrastructure.

In a letter to Mr. Colin Baker, the general secretary of the NFSP, on 19 October, the director of postal services—network and markets—in the DTI commented:

"There is a lot to do to put in place these sophisticated, if commonplace, banking arrangements".

That is a masterpiece of understatement. The IT project in question is massive, if not revolutionary. It involves a great deal of development work, provision of infrastructure and training. None of those were in place in October. The contracts were not let until November, when a decision was taken to split the contracts between the basic bank account, which was to be provided by LINK Interchange Network Ltd., and the Post Office bank account, to be provided by EDS/Citibank.

Since then, I have had a number of meetings with representatives of those companies and with representatives of IT companies on a wider front. The one word that keeps coming back to me about the project is "challenging". We can assume that that means well nigh impossible to deliver on the date on which Ministers still assure us it will happen. One of the leading IT manufacturers told me that the industry norm for such a project would be to have it developed and operational at least 12 months before it was to go live. That time would be needed to identify difficulties, to train the personnel who were to install the system and use it and to ensure that it was working to everyone's satisfaction.

Twelve months before the new payment system is to go live is the beginning of April this year, yet we know that the contracts have only just been let and that progress on development is limited. We are at a loss to know how personnel are to be trained, as the Government tell us nothing about that. We are at a loss to know what the migration policy is—what its objectives are, let alone how it is to be implemented. Again, the Government will not tell us. They will not tell us anything at all about the project. They merely repeat that it will be all right on the night and that the system will be ready in April.

Nothing would delight me more than if that were the case, but if not, there is an argument that for other benefits, there is a period of migration which allows for flexibility, but the child tax credit is not a mobile target. It is to come into effect in April 2003, so there is a fixed deadline for that element of tax credit. There are serious fears that the system will not be ready. The new clause would provide a plan B for the Government. They may well need such a plan to allow people to receive their payments through the Post Office on the specified date if they do not have a bank account.

What is the argument against such an alternative? The only argument against the ability to make such arrangements if the Post Office card account is not ready is that the Government want to move people towards basic bank accounts instead of towards the Post Office card account. That is what the clearing banks think. They feel that they have been sold a pup and coerced into providing the services, while the Government do not intend the card account to be ready on the day. If it is not ready, people will be pushed into basic bank accounts, irrespective of their wishes. The post offices share that suspicion and see such a move as very retrograde, as people who have bank accounts may well opt for the bank rather than the Post Office. All the benefits that would accrue to the Post Office system would then be nugatory. Clearly, the Government have an argument in terms of reducing costs, but not in terms of providing the choice that they have always maintained to be the basis of their proposals. That is why the new clause would provide an appropriate safety belt for the Government and for the system.

The new clause has another separate purpose. Subsection (3) would extend the payment system for working tax credit into the same payment framework as the other payments. That is another very important aspect of the new clause. I understand that the Government's argument against the proposal is that they want to preserve the linkage of working tax credit with work, but they take the deeply patronising view that recipients can make the connection only if two lines to that effect are written on their pay cheque, rather than on their bank statement. That view is wrong.

The arguments for providing the option proposed in the new clause—it is not a compulsory course of action—are threefold. First, it would reduce costs for employers. That is a valuable objective and I know that my hon. Friend the Member for Teignbridge will amplify that point in terms of small employers if he can catch your eye, Mr. Deputy Speaker. Secondly, it would extend control to the recipient, which is right in itself. Thirdly, it would help to safeguard our post office network—something that hon. Members in all parts of the House would see as a key objective.

David Cairns (Labour, Greenock and Inverclyde)

Surely the proposal would achieve a significant reduction in an employer's costs only if all the employees in a company opted to take their payment through their payment book at the Post Office. If one employee did not take the option—the hon. Gentleman said that it is an option and is not compulsory—the employer would still have to set up the system, fill in the forms and cross a certain cost threshold. A significant saving will be secured only if all the employees of a firm opt to go to the Post Office. How will he make that happen?

David Heath (Liberal Democrat, Somerton and Frome)

I gently suggest to the hon. Gentleman that he is perhaps talking about big business and has never had experience of a small business with a small number of employees. It is perfectly possible that all the employees in such a business might opt for the proposal, not least because there might be only one employee who is receiving the relevant payment.

Hugo Swire (Conservative, East Devon)

Does the hon. Gentleman agree that the point of the proposal is to give people a choice? It is important that people should have such an option.

David Heath (Liberal Democrat, Somerton and Frome)

The hon. Gentleman is absolutely right. Typically, the Government want to extend not choice, but compulsion, because there is only one way of delivering the objectives that they have in mind. We reject that position and I think that he probably rejects it as well.

Mark Hoban (Conservative, Fareham)

The hon. Member for Greenock and Inverclyde (David Cairns) mentioned set-up costs. The other costs that are borne by employers—the £90 million a year that the package will cost—are related to individual transactions. Although the set-up costs will be lost if all employees opt out, costs will still be reduced even if some of them remain in the system and are paid as before through their payroll, because there is a transaction cost as well as a set-up cost.

David Heath (Liberal Democrat, Somerton and Frome)

The hon. Gentleman is, of course, absolutely and transparently correct. The matter involves not all employees, but those who are receiving working tax credit. Often, only relatively small numbers of employees would be involved, so it is not unrealistic to assume that the new clause would have tangible benefits for employers.

I know that other hon. Members wish to speak to the new clause, so I shall conclude my remarks. I repeat that this is a win-win situation for the Government. No additional cost would accrue to them and the new clause would provide real benefits for individuals. It would safeguard our post offices at a time when many people are yet to be convinced that the Government's proposals, however creditable, will be in place when they are needed to safeguard the system. I commend it to the House.

Howard Flight (Conservative, Arundel and South Downs)

The first part of the new clause deals with an issue that was extensively discussed in Committee. I put it to the House that there is not only a likelihood but an extremely strong probability that the arrangements that the Government envisage for delivering the new tax credits in April 2003, essentially through the universal bank, will not be in place. When the subject was discussed in Committee, after we had asked a number of questions, the Paymaster General effectively said that the Government accepted that that could happen and that standby arrangements were in place to deliver payment—it certainly included the child tax credit—by coupons or order books at post offices. I looked through the Bill, but could not find where it provides for such arrangements, so in principle, the new clause seems to be necessary to ensure that they are covered.

Rather than commenting on the proposed arrangements for the option on payment of working tax credit, however, I should like to focus on amendment No. 13. The Government are well aware that the Opposition believe in principle that the arguments stack up in favour of paying working tax credit not through employers but directly to recipients. One of the main arguments that they have put forward for paying it through employers is that of stigma. Amendment No. 13 is designed to test that argument. Rather like the second part of the new clause, it seeks to offer an appropriate option on a collective basis. Therefore, it requires a consultation process between employers and employees to take place before the obligation for employers to pay the credit through the pay packet takes effect. Implicit in the proposal is the idea that, if a majority of employees prefer to be paid directly by the board, that is the arrangement into which the company would enter.

We are extremely surprised that the Government have paid no heed to the arguments against paying working tax credit directly to beneficiaries. The evidence—in so far as it exists—is indeed that more stigma is attached to payment through the pay packet, as people's personal backgrounds will implicitly be known by their employers and often, as a result, by their work colleagues. The National Association of Citizens Advice Bureaux has made the point that, notwithstanding the provisions of the Bill, employers in smaller businesses could be discouraged from employing people if that entailed the hassle of administering working tax credit. There is strong evidence that the stigma element would be greater as a result of payment through the pay packet than as a result of direct payment.

David Cairns (Labour, Greenock and Inverclyde)

This is one of the issues that I hope to raise later. The hon. Gentleman has twice referred to extensive evidence that greater stigma attaches to payment through the pay packet than to payment through the order book. Other than the anecdotal evidence that he has given, can he outline exactly what that extensive evidence is?

Howard Flight (Conservative, Arundel and South Downs)

I refer the hon. Gentleman to the studies, which I have already mentioned, undertaken by the National Association of Citizens Advice Bureaux and by the Institute for Fiscal Studies.

Have the Government taken into consideration the fact that people in marriages and partnerships frequently hold joint bank accounts, and that those accounts might sometimes come under pressure from the more powerful character in the partnership? Going back to the child tax credit, one of the results of paying everything automatically through a bank account, as the Government wish to do, is that that might undermine their correct intention that the money should go to the carer.

The Government suggested, somewhat unenthusiastically, in Committee that if the recipients of child tax credit really wanted to go on receiving their payment through vouchers that were cashable at post offices, they would be able to do so. It is still not clear whether that is a realistic option. If there is a genuine intent that child tax credit should go to the carer, I suggest that that is more likely to be achieved by permitting those at the poorer end of society, in particular, to receive it through vouchers, rather than by forcing them down the bank payment route.

I return to the question whether working tax credit should be paid directly, which we believe remains the better option, or by employers. The Government have refused to accept that the result of what they are seeking to achieve will be to produce a social wage. People will take home a certain amount of money, but they will not understand the details in terms of whether they have paid tax, or of how much of the new negative tax rate income they have got back. They will simply have a sum of money. In many cases, their take-home pay will bear no relation to the economic market value of the job that they are doing.

We remain concerned that that will act as a disincentive to people to up-skill themselves and to improve the amount that they earn, and as an overall disincentive to productivity improvements in the economy. I urge the Government to be a little suspicious of the CBI's support for payment via the payroll. It is clear that that is attractive, and I recollect the Paymaster General making certain references to that effect. There are attractions to employers in having pay subsidies, because they reduce the pressure to pay a proper rate for the job and exert downward pressures on rates of pay. If the Government ignore that important aspect of the question, they do so at their peril and in the face of what is already happening.

Amendment No. 14 is a probing amendment, and we discussed some of the issues involved in Committee. The proposal is a response to the issues raised by the Government's better regulation task force and by the Carter report. The burdens of administration transferred on to businesses by the Government have fallen particularly on small companies with fewer than four employees. That represents something like £25 million out of their total costs. Worse than that, of that £25 million, small companies spend some £15 million not on payments but merely on keeping on top of the regulations and the requirement to know what they are supposed to be doing.

We have argued consistently that it is undesirable for small businesses to be burdened with such administrative costs and focuses, when their main task is simply to keep their business alive. The Liberal Democrat amendment has proposed a slightly smaller minimum floor at which businesses would be exempt than the one that we have proposed, but it deals with the same issue of principle. Will the Government consider the points made by Lord Haskins and his taskforce in relation to small businesses?

Mark Field (Conservative, Cities of London and Westminster)

Prior to entering this place, I ran a small business that would have come within the scope of the Liberal Democrat amendment and our own, in terms of the number of employees. My concern is that whatever level is set, when a company gets near to that level it will provide a big disincentive to taking on any more employees. I am sure that that point will be addressed by the Minister later. What thoughts does my hon. Friend have on the matter?

Howard Flight (Conservative, Arundel and South Downs)

I thank my hon. Friend for his comments. I was about to come to the other part of our amendment, which proposes that the Government should consider measures for the Board of the Inland Revenue to refund to companies the cost of administering working tax credit, if they remain charged with that burden. Again, this is a probing amendment, and we have touched on this subject before.

After consulting widely with businesses, it is clear that they understood that the relevant territory covered by the Carter review and the comments of the Chancellor of the Exchequer were not just concerned with technical arrangements for payroll—which, I grant, is most of Carter's territory, as the Paymaster General has pointed out. Businesses also understood that the Chancellor had indicated in the pre-Budget report that the Government would consider some refunding of costs for administration carried out on behalf of the Government in relation to working tax credit. That is particularly relevant to small businesses, if they are not to be exempt.

The total administrative costs for businesses is now of the order of £250 million a year, which covers tax credits, student loan repayments and the administration of stakeholder pensions. The Government will be turning a blind eye if they do not appreciate that business perceives them to have recognised those costs and to be thinking of doing something about them. In Committee, it was clear that the Government were not interested in so doing, and that they felt that businesses should be very pleased with the working tax credit because it would subsidise employment for them. However, I wish to give the Paymaster General a further opportunity to consider the matter, because that is certainly what business expects.

The amendments grouped with new clause 2 interact and relate to each other, but there are separate issues to consider. First, will the Government even be able to deliver the child tax credit, given the running-down of post offices, the likely failure of the universal bank and the lack of provision in the Bill for an alternative? Secondly, will they reconsider giving employees at least the option to receive working tax credit payments directly, whether on a corporate basis or as specified in new clause 2(2), when they express a wish to do so? Thirdly, it is necessary to tease out of the Government yet again whether they are willing to compensate business for the costs of administering their programmes.

Richard Younger-Ross (Liberal Democrat, Teignbridge)

I support the new clause and the amendments grouped with it and want particularly to discuss further the effects on employers. As the hon. Member for Arundel and South Downs (Mr. Flight) said, the Liberal Democrat and Conservative amendments differ only in detail rather than principle. The principles are one and the same.

I have looked up some figures on small businesses. Although I do not have a figure for the number of businesses that employ 15 or 20 people, 83 per cent. of companies employ 10 people or fewer. It might be argued that if 83 per cent. of businesses were exempted from the proposal it would have a dramatic effect, but it would not, because only about 20 per cent. of employees would be affected. Therefore, it is possible, and with minimal effect, to encourage enterprise and remove a burden from a very large number of businesses.

Let us consider the overall cost of the burden on small businesses, which is constantly growing and never seems to diminish. The British Chambers of Commerce has compiled figures from the regulatory impact assessment prepared by the Government. The total updated cost, until May 2002, now runs to £15.6 billion. The working tax credit will cost some £262 million and the student repayment loan—another burden on small businesses—£255 million. Businesses, especially small businesses, are bearing heavy burdens that have an effect on the ability to grow and progress.

Without wanting to put words in its mouth, I am sure that the British Chambers of Commerce would support the Conservative amendment as much as ours. I have a note from it:

"The British Chambers of Commerce very much welcomes this amendment. In the week it published its own Regulatory Reform Action Plan. It shows Government how to seriously go about cutting the burdens on business. Government will no doubt spout out figures about only 1 in 8 businesses being affected by tax credits, but that 1 in 8 equates to 175,000 small businesses."

That is a heavy burden.

Let us consider what other employer organisations say about tax credits. The CBI has spoken in favour and its parliamentary brief says:

"The CBI supported the introduction of the tax credits system . . . as a valuable way of incentivising work."

However, it warns:

"The CBI believes that, if there is no possibility of administering the tax credits system within the Inland Revenue, employers should be compensated for the administrative costs associated with running the scheme."

That proposal is included in one of the amendments. Other amendments might also reduce the burden and cost by exempting a large number of businesses from having to administer the scheme.

The Bath report considered tax credits and concluded that

"the pattern of compliance costs discriminates against small employers in that the bottom thirty per cent of employers bear seventy five per cent of the compliance costs."

That cannot be right. New Labour wants "New Britain" to have an enterprise culture and, if we are to have an enterprise culture, encouraging small businesses to thrive is vital.

Some 90 per cent. of Government revenue is collected by businesses. Employers are responsible for statutory sick pay and maternity pay administration. Family-friendly schemes introduced in the past two years such as the Employment Relations Act 1999, the working time directive, the Data Protection Act 1998 and the national minimum wage, which I support in principle, are all burdens on businesses, and on small businesses in particular.

Steve Webb (Liberal Democrat, Northavon)

Lest my hon. Friend be misunderstood or misquoted, I presume that he is drawing a distinction between measures such as the minimum wage, which we supported and which are beneficial, and tax credits, which can be delivered other than through the pay packet. Whereas the minimum wage can be delivered only in that way, tax credits need not be a burden on business.

Richard Younger-Ross (Liberal Democrat, Teignbridge)

I am grateful to my hon. Friend for drawing that distinction. I am not saying that we do not support some of those measures, the burden of which must be borne by business, but we must consider the overall burden; if it is not necessary for business to bear a particular burden, it should not have to do so. Small businesses can therefore be exempted and encouraged. We must look at the total picture and not consider such matters in isolation.

America has, in principle, exempted businesses by using the standard of turnover of less than $500,000. Alternatively, companies that employ fewer than 15 people or fewer than 20 people are exempt from certain legislation. That proves that such measures can be achieved in an enterprise culture.

In France, small businesses hold a nominal percentage of the tax collected to help them with the tax collection burden. The cost of tax and national insurance collection for large UK companies with more than 5,000 employees is about £5 per employee. The cost for companies employing between 1,000 and 5,000 people is about £30 per employee. For companies with between 500 and 999 employees, the cost is about £29 per employee. However, the cost for very small companies with between one and four employees is an astronomical £288 per employee.

I know that the Government are minded to help small businesses and are aware of the burdens of regulation. The Prime Minister commented on the working time directive in November 1999:

"I can see myself how some of the regulation is over the top. The problem is being recognised but more needs to be done."

If the burden has been recognised and more needs to be done, we have an opportunity to relieve the burden through the Bill.

The Minister responsible for small businesses was quoted in The Sunday Times on 30 January 2000:

"It is about balancing the right of individual employees to fair treatment against demands on the employer. Once you get to 20 people it is very different from running a tiny company."

That is one reason why the figure I quoted is slightly lower—the differences are in that band.

Devon has many small businesses—about 37,000. More than three quarters of employers throughout Devon have fewer than 10 employees. I want those businesses to thrive, prosper and grow, but they will not do so if we increase the burden on very small businesses. Instead of being able to climb the mountain of success, they will come across a rock face that they find hard to scale. Progressing from being self-employed to employing others should be made as easy possible, so I ask the Government to consider their response to the amendments carefully.

Mark Hoban (Conservative, Fareham)

I welcome the grouping of the new clause and the amendments, because together they point up one of the issues at the heart of the Bill: the obligation on businesses to pay working tax credit, leading to a high burden on employers. Employers have to bear the cost of administration of working tax credit only because they are required to pay that credit to their employees.

Let me remind the House of the burdens that the Government have placed on businesses. The cost of the Bill, as set out in the regulatory impact assessment, is about £90 million. I welcome the reduction compared with the previous regime, but it is still a significant cost on business. Employers face a problem. In a survey conducted by the Association of Chartered Certified Accountants in July 2001, 97 per cent. of respondents felt that the burden of payroll compliance had increased since April 1997, and 78 per cent. referred specifically to the administration costs of the working families tax credit.

The real cost falls on smaller businesses. The average payroll cost per head for a business with between one and five employees is £288. That is a terrific cost when compared with the cost for businesses employing more than 5,000 employees, which averages at about £5 a head.

I am especially interested in amendment No. 16, which has the deficiencies that my hon. Friend the Member for Cities of London and Westminster (Mr. Field) highlighted earlier. By setting a limit of 15 employees, it would create an artificial barrier to taking on additional employees. That stands in contrast to amendment No. 14, under which the Board of Inland Revenue would refund employers' costs but which has an opt-out provision for companies with fewer than 20 employees, whose tax credits would be paid directly by the Inland Revenue.

It is a shame that amendment No. 14 is needed at all, because I would much rather the Government did not impose this burden on businesses, but by requiring the Inland Revenue to reimburse the costs it would demonstrate to the Government once and for all the true cost of compliance. Far too often, the Government impose burdens on business without understanding the true cost. Estimates are published in regulatory impact assessments that are riddled with caveats and assumptions. The amendment would lift part of the £90 million burden from business, and the other part of the burden would disappear for businesses with fewer than 20 employees.

My hon. Friend the Member for Arundel and South Downs (Mr. Flight) referred to the consultations between employers and employees concerning whether benefits should be paid directly to employees by the Inland Revenue, rather than by the employers. Some people have a problem with tax credits being paid through payroll services, because they want to separate clearly their personal lives and domestic finances from their lives at work. They do not want their employers to know about changes in personal circumstances, such as divorce or—a term that was used in Committee—partnering up, which affect the payment of tax credits. I suspect that many employees, following consultations with employers, will opt for direct payment. Many will prefer that, and it will remove some of the perceived stigma attaching to the credits.

The hon. Member for Somerton and Frome (Mr. Heath) referred to post offices. Too often in debates on post offices, people refer solely to the rural post office network and the sub-post offices there. Those of us who represent urban areas also have a network of sub-post offices that we wish to sustain. That is an important factor to be borne in mind. The option to enable payment through post offices, either through the order book system, which will act as a failsafe in case the universal bank does not come into effect—as seems increasingly likely—or through such a bank account, will generate the traffic that sub-post offices in urban and rural areas need to sustain their business.

Quite often, the shops are not just a post office counter but provide a wide range of services and are a valuable local amenity. Any measure that will improve the traffic flowing through the sub-post offices is valuable.

David Heath (Liberal Democrat, Somerton and Frome)

I am extremely grateful to the hon. Gentleman for drawing the important distinction between urban and rural post offices and explaining the fact that this applies to both. I was at pains to mention the sub-post office network rather than just rural post offices, because the impact of the loss of benefit traffic is often greater on the urban sub-post offices, which rely on it more heavily.

Mark Hoban (Conservative, Fareham)

The hon. Gentleman makes a valid point. Often, urban sub-post offices rely on the trade from benefit, as it were, to keep them afloat. They also often exist in some of the most deprived areas of our constituencies, where people are least likely to be able to travel from their homes to a main post office in the town centre. In our consideration of the hon. Gentleman's proposals, the importance of sub-post offices to elderly people and young mothers should not be underestimated.

The new clause and the amendments are designed to preserve some of the social fabric of our rural and urban communities and would help to reduce the costs imposed on businesses. We should not be too churlish about the actions that the Government have taken to reduce those costs through their reform of the tax credits system—in Committee, the Paymaster General referred to some of the representations that she had received from business organisations welcoming the changes—but I hope that the House will take advantage of the opportunity that we now have to reduce those burdens once and for all by enabling employers with fewer than 20 employees to have the tax credits paid directly to those employees, and by ensuring that other businesses have their costs reimbursed by those who impose them—in this case, Her Majesty's Government.

Hugo Swire (Conservative, East Devon)

I am particularly interested in this group of amendments, tabled by ourselves and the Liberal Democrats, because I represent a constituency that, like that of the hon. Member for Teignbridge (Richard Younger–Ross), has a lot of small businesses. My local businesses employ an average of between three and five people. We are a diverse community, largely rural but with some urban areas—and, if I may do so without straying too far from the new clause, Madam Deputy Speaker, I want to talk about post offices and how they fit into that pattern.

Having sat through the Standing Committee stage—that was a steep learning curve for me—I believe that when the Government introduce new legislation they have an opportunity that they do not always get: the opportunity to get things right. Our amendments will steer them in that direction.

In Committee, my hon. Friend the Member for Arundel and South Downs (Mr. Flight) spoke lucidly about post offices and the role that the universal bank will play. It is true—although I must not go over old ground—that many of the neediest people, to whom the Bill will be of most benefit, do not have bank accounts. As my hon. Friend the Member for Fareham (Mr. Hoban) said, those people—such as the elderly and single mothers—would usually find it easier to go to their local post office, whether they live in a rural or an urban area.

New clause 2 says that anyone who so wishes should be able to

"receive payment into a basic account accessible at a Post Office".

That raises the question of what an accessible post office is, and what is accessible once people get there. One of the problems in rural areas is the number of post offices that are closing. There is some evidence that the rate at which—

Sylvia Heal (Deputy Speaker, Halesowen and Rowley Regis)

Order. I must bring the hon. Gentleman to order. We are talking about tax credits, not the future of the post office network.

Hugo Swire (Conservative, East Devon)

Thank you, Madam Deputy Speaker. I was trying not to stray too far from the new clause, but obviously I failed.

When we think about how we want people to receive their benefits, we must recognise the role of post offices. At this stage I shall make only a few comments about the burden on business, because we shall be debating that subject all afternoon. We have heard comments from the CBI, the Institute of Directors and others, but we should also listen to the Federation of Small Businesses and the British Chambers of Commerce.

As I have said, most of my local businesses in East Devon employ very few people. Small businesses represent the engine room of the economy, and any Government who want that engine room to grow should aspire to enable those companies to employ more people. Yet the Bill as it stands acts as a disincentive to employing 15 or 20 people. What on earth is the incentive to expand a business if that merely invites extra costs and red tape?

I fully agree with the comments that have been made about stigma; indeed, the stigma may apply more in small businesses, where people are more likely to know each other socially than people in larger businesses. The fact that people's pay packets may not be a true reflection of the job that they do could cause dissent, and will be bad for morale.

I urge the Government to take on board what the Opposition are saying, and especially to recognise that post offices will have a problem, particularly between now and when the universal bank is set up. Our suggestions would give the Government a real opportunity to do what they claim they wish to do, and help those hard-pressed sub-post offices. They have the opportunity at least to nod towards the concerns expressed by the various bodies that represent small businesses, such as the British Chambers of Commerce and the Federation of Small Businesses, which are worried about ever-increasing regulation and red tape, and the interference in the lives of people employed by small businesses. I hope that the Government will take our amendments in good part, and respond to them later.

Peter Luff (Conservative, Mid Worcestershire)

I think that all those who served on the Standing Committee would admit that it was good natured throughout its proceedings. Whatever differences there might have been between the two sides of the Committee on some issues, there was a common desire to improve the lot of the poorer people who will benefit from this Bill. That spirit characterised our debates.

The Committee was intimidating, too, because it included not only the Financial Secretary to the Treasury, who is a distinguished lawyer, but the Paymaster General, who is one of the most talented Ministers in Her Majesty's Government, a professor of social policy representing the Liberal Democrats, and one of the most distinguished understanders of the City of London, my hon. Friend the Member for Arundel and South Downs (Mr. Flight). Those of us with no such qualifications—apart from a dim memory of an economics degree—felt inhibited from speaking.

On the issues relating to new clause 2 and the amendments that have been grouped with it, however, passions began to be aroused. Uniquely, we got the hon. Member for West Renfrewshire (Jim Sheridan) to intervene on that subject; it was his only contribution. The hon. Gentleman made the traditional old Labour case. I shall not quote his contribution in full, but he said:

"I thank the hon. Gentleman"—

I think that that was my hon. Friend the Member for Fareham (Mr. Hoban)—

"for this nostalgic trip back to the dark days of his Government, whereby any legislation enhancing the life of people"—

Sylvia Heal (Deputy Speaker, Halesowen and Rowley Regis)

Order. I hope that the hon. Gentleman's remarks will now be germane to the amendments that we are discussing.

Peter Luff (Conservative, Mid Worcestershire)

They will be strictly germane, Madam Deputy Speaker. I am sorry for my rather lengthy introduction—that was always a fault with my university essays, and I was regularly marked down for it. [Interruption.] I did not hear what the Paymaster General said then, but I hope that Hansard has recorded it, because it is always worth listening to what she has to say.

The hon. Member for West Renfrewshire continued by saying that in times like the dark days of the Conservative Government:

"any legislation enhancing the life of people in the lower quartile of our society suddenly becomes a burden on businesses . . . It is ridiculous in this day and age to say that about legislation that allows workers to work for less than 48 hours a week or sets a minimum wage, which takes people off benefits so that they do not need tax credits. It is nostalgic rubbish."

I understand the sentiments that the hon. Gentleman was expressing, but if he were here I would invite him to reflect on exactly what our amendments would do. In Committee I talked about the road to hell being paved with good intentions—and to use another cliché, this is the straw that breaks the camel's back. We all share a desire to enhance the lives of our poorer constituents, but we must look at the consequences of the mechanisms that we choose.

If we put unacceptable burdens on the businesses that support those people, we risk destroying the mechanism that creates the jobs, which lies at the heart of any Government's ability—and the private sector's ability—to remove them from poverty. That is the crucial point.

Ultimately, this is not a matter of great principle, but a matter of balance. We all accept that from time to time Governments must intervene in the affairs of the private sector to enhance some greater social good. As I made clear in Committee, that is a principle to which Conservative Governments have adhered down the centuries. The question is: when has that process gone too far? At what stage do we start putting that process at risk? Our amendments present the Government with a real case to be answered. They should say to themselves, "This may be the moment when the process has begun to go too far."

I have already said that I have a high regard for the Paymaster General—but she was a bit naughty when she quoted so selectively from the words of the brief that the CBI sent to members of the Standing Committee. She described the CBI's position as follows: She said that the CBI brief stated:

"The CBI supported the introduction of the tax credit system, including paying via the pay packet, as a valuable way of incentivising work. In that context, it also supports the extension of the principle of tax credits to employees without children."—[Official Report, Standing Committee A, 22 January 2002; c. 143, 153.]

All well and good. That is indeed what the CBI said in its briefing note, but sadly for the Paymaster General, who quoted only the first two sentences, that same paragraph continues:

"Nevertheless, employers are concerned at the rising burden of payroll administration and their growing role as paymasters of the benefit system. When the government originally suggested payment via the pay packet it indicated that the system should be paid via tax codes, but this now appears impractical. The CBI believes that, if there is no possibility of administering the tax credits system within the Inland Revenue, employers should be compensated for the administrative costs associated with running the scheme."

That is the full and complete CBI position, according to a paragraph from the briefing entitled "CBI position." With respect to the Paymaster General, that is what our new clauses seek to deliver: the CBI's position as fully expressed, and not as selectively quoted.

I shall not trouble the House by quoting the briefing at length, because to do so would be tedious, but I shall read out its final paragraph, which is just one sentence long:

"Over the longer term, the CBI remains convinced that a technical solution is required which will allow payment via the pay packet to be administered by the Inland Revenue and bypass need for employer intervention completely."

The CBI is advocating an interim solution, and the Paymaster General must address this issue when she winds up this debate rather more convincingly than she did in Committee.

Historically, the CBI has not been particularly good at speaking up for the interests of smaller businesses, but I am glad that, under Digby Jones, it at last seems to be doing so. That is the spirit and rationale that underlies the CBI's position. I am pleased to say that, typically, local chambers of commerce are rather better at standing up for smaller businesses, which would be affected by the amendments and new clauses tabled by the Liberal Democrats and by my hon. Friends.

The Herefordshire and Worcestershire chamber of commerce pointed out to me that a huge proportion of businesses in Worcestershire are smaller businesses. It said that 84 per cent. of businesses in Worcestershire employ 10 people or fewer, and that payroll costs create a real problem for such businesses. I shall read a paragraph from a letter from the chamber of commerce that I quoted in Standing Committee, because it is of huge importance and the whole House has a right to hear it:

"Each of the tax credit or collection items adds an amount of administration and therefore cost to the job of operating the payroll. It must be remembered that the person doing the payroll is often the owner manager, their expertise is probably in the field in which they started the business and they will have varying degrees of expertise. People running small businesses already need to be multi skilled and able to turn their hands to many tasks, however there is a danger in increasing the non-core workload, that is not income generating, too much."

Hugo Swire (Conservative, East Devon)

Following on from what my hon. Friend has just said, does he agree with the similar comments of Donald Martin, the UK policy chairman of the Federation of Small Businesses? Mr. Martin said:

"Businesses should not be treated as a social welfare arm of government. It is an invasion of employee privacy and a major distraction from the business of wealth creating activity."

Peter Luff (Conservative, Mid Worcestershire)

My hon. Friend makes a very powerful point, but sadly, the scope of the new clauses and amendments under consideration does not allow us to debate—as I would like to do—invasion of privacy. We are focusing on the cost, and new clause 2, which I shall come to in a moment, focuses on the method of payment. I strongly agree with my hon. Friend, however, and those are issues that have to be taken seriously.

I urge the Paymaster General to recognise in her response that I am not trying to belittle the Government's attempts to reduce poverty. We all want to reduce poverty, but we must consider how to strike a balance and what mechanisms to use. It is probably asking too much for the Government to consider these new clauses and amendments sympathetically, but they should consider something similar in another place, or undertake to find another mechanism to reduce cost at a later stage, so that the CBI's long-term hope can come to fruition.

A year or so ago, something happened in my constituency. The complaints that we have always heard from the small business sector acquired a new urgency and fervour. There was a change of spirit—I do not know what caused it—and the sense that the burden had become too great was suddenly made very vocal.

In Standing Committee, the Paymaster General helpfully said that, in her view, the overall effect of the Bill might be to reduce the burdens on business. However, her confidence is not necessarily shared by the business sector itself, and experience certainly proves that that sector is right to be sceptical and cynical. It would help if she could explain why she is confident that, even at the margin, the proposals, without emendation, might reduce the burdens on business. That would be an encouraging message, if she can deliver on it.

I realise that new clause 2 represents an example of the law of unintended consequences. It deals with the payment mechanism and is primarily inspired, I expect, by a desire to help the claimant by offering choice. As the hon. Member for Somerton and Frome (Mr. Heath), who spoke so effectively at the beginning of this debate, made clear, the Government appear to be hostile to offering choice in almost anything. However, offering the option of the payment mechanism seems a prudent and sensible step, and I endorse all that the hon. Gentleman said about choice.

As I said, new clause 2 also illustrates the law of unintended consequences, because it would affect the post office network at the margin. You have rightly said, Madam Deputy Speaker, that we should not debate that issue and I shall not do so, but in answering the debate it is important for the Government to bear that helpful benefit in mind. The post office network is in crisis. Thousands of post offices are closing and anything that we can do to increase footfall in sub-post offices would be helpful. Although new clause 2 may be inspired by the desire to help the claimant, it would have a very useful side-effect that hon. Members must concentrate on and bear in mind when they vote. I hope that we will have the chance to vote on new clause 2, because I certainly wish to support it in the Lobby.

New clause 2 also goes a long way towards addressing the issue of stigma, which has been thrown around, and to which my hon. Friend the Member for East Devon (Mr. Swire) referred in his intervention. In 1998, Martin Taylor, author of the Government-commissioned report on work incentives, told the former Social Security Select Committee that there was no empirical evidence to suggest that the working families tax credit would have an effect on stigma. He said:

"As far as stigma goes, the hard and fast evidence in all these non-financial and psychological matters is difficult to come by."

The Government would be ill-advised to hang too much of their case on that point.

The Government should also remember that a formidable alliance shares the view that we are right to be sceptical of the stigma claim. The National Council for One Parent Families, the CBI and the Institute for Fiscal Studies have all warned that the stigma attached to means-tested benefits could actually be increased by paying the credit through the payroll. In its document entitled "Credit Where it's Due", the Institute for Fiscal Studies says:

"There is no evidence, though, that payment in this way improves work incentives or reduces stigma: the WFTC evaluation programme has not yet produced estimates of WFTC take-up or the impact on employment."

It also suggests that

"for some, payment through the wage packet has been perhaps more stigmatising and certainly more hassle than direct payment."

I know that the words of the Institute for Fiscal Studies are always taken very seriously in the House.

In his opening speech, my hon. Friend the Member for Arundel and South Downs referred to the National Association of Citizens Advice Bureaux. In February, it published a report affirming that claimants should be given a free choice between direct payment and payment through their employer. The Paymaster General should also be concerned by NACAB reports of staff being dismissed as a result of their employers being forced to administer their claim for tax credits. I do not condone that behaviour. It is often the case that when we consider legislation we have to consider the world as it is and not as we would like it to be. Behaviour of that kind by employers is wrong and against the spirit of legislation, let alone their broader social responsibilities, but it is the inevitable consequence of a system like this one. The NACAB report states:

"For many people, getting paid tax credit by their employer is simply not worth the trouble it can cause. Some employers consider the administrative burden too great for them to manage. In a small number of cases people have been sacked just for claiming tax credits. Other staff have pressure put on them to reduce their hours so they don't qualify, or are threatened with the sack."

New clause 2 and its grouped amendments deal with two separate issues, both of great importance. The next group of amendments concerns the other important issue of fraud, and the House will wish to explore that at some length.

The Minister must ask herself in all conscience whether she has got the balance of burdens on business and the social obligations of businesses in the wider community right. The amendments, which would relieve employers of some costs and exempt some employers from the provisions altogether, are the right measures because they will enhance employment and wealth throughout society. That is an issue with which she must always wrestle.

The hon. Lady must be careful about relying on some of her well-rehearsed arguments on stigma and so forth. She should also consider the wider benefits of new clause 2—not only the benefits of choice that have been mentioned, but the wider social benefits of protecting the network of post offices. The new clause and the amendments have a huge amount to recommend them to the Government. I urge her to consider them sympathetically. If she has to reject them now, please will she reconsider them in another place?

Dawn Primarolo (Labour, Bristol South)

This has been an interesting debate, although much of the ground was covered in Committee, and it has centred on two issues. First, the new clause and the amendments would impose restrictions on the Inland Revenue board's powers to make payments both direct to the claimant and through the employer—the new clause and the amendments cover a number of issues to which I will return. Secondly, the amendments try to deal with the burdens on the employer.

I share the enthusiasm of the hon. Member for Teignbridge (Richard Younger–Ross) for seeing small businesses thrive and grow. I remind him, however, that the working tax credit makes it possible for employers to draw on a wider pool of labour, as it enables more people to make the move into work and stay there. Employers also derive benefits from having employees in low-income households supported while they make that transition into work.

I also agree with the hon. Member for Mid-Worcestershire (Mr. Luff) that the road to hell is paved with good intentions. I will demonstrate that the amendments and new clauses tabled by the official Opposition today would restrict the choice of and increase the burdens on employers, which is the exact opposite of what they claimed they were trying to do.

New clause 2 and amendment No. 15 attempt to impose an obligation on the Board of the Inland Revenue to make all direct payments of the new tax credits by order book through the post office. The amendment would restrict the manner in which payments could be made to that set out in the new clause. The new clause goes on to allow the board to make payments by automated credit transfer, but only through a "basic account", accessible at the post office and then only if the claimant has chosen that payment method.

Let us be clear that the new clause would in effect offer the claimant no choice. Claimants would not have the choice of the payment going into their bank account, if they already had one. I am talking not about what the proposer of the amendment thinks he has done, but what he has done. The board cannot make emergency payments—

David Heath (Liberal Democrat, Somerton and Frome)

rose—

Dawn Primarolo (Labour, Bristol South)

The debate started at 2.50 pm and has been long. Many issues have been covered. I will be more than happy to give way to the hon. Gentleman when I have made some progress.

The new clause would allow the board to make payments by automated credit transfer, but only through the basic account accessible at the post office and then only if the claimant had chosen that method of payment.

There was much discussion of the Post Office. Here, we are concerned only with the payment made. I remind hon. Members that the powers in the Bill are permissive powers for the Inland Revenue to determine how claimants will be paid and what choices they will have. I will be happy to deal with that subject after I have given way to the hon. Member for Somerton and Frome (Mr. Heath), but first I must inform the hon. Member for Teignbridge that the classic problem for some Liberal Democrat Members seems to be accepting a principle, but not accepting the consequences of implementing it. I also remind him that the Liberal Democrats opposed the working families tax credit. While we are more than happy that they now think that the child tax credit is the way forward, they need to be careful as they venture into that territory.

David Heath (Liberal Democrat, Somerton and Frome)

I do not understand the basis for the start of the Paymaster General's speech on this subject. She is claiming that the new clause and amendments would leave out the parts of the Bill that deal with alternative methods of payment, which they clearly would not. Furthermore, she interprets the word "entitlement" to mean a requirement on the Board of the Inland Revenue. I know of no construction that enables the word "entitlement" to be termed an instruction to the board, allowing no other means of payment. Perhaps the hon. Lady will elucidate.

Dawn Primarolo (Labour, Bristol South)

Indeed I will. The Bill gives authority to the board of the Inland Revenue to administer the new tax credits under its care and management functions. If the hon. Gentleman had been able to attend the Standing Committee—he was not a member—he would have heard some discussion of how those obligations interact with the Bill.

With the exception of transfer into bank accounts, there is no statement in the Bill to list the precise ways in which the credit can be paid. As I said in Committee, the preferred option would be a direct transfer to a bank account—both individual's bank accounts and through the universal bank at the post office. I said that we needed to ensure that that payment was made. I understand why the hon. Gentleman is frustrated, but as he well knows, when one drafts an amendment one needs to know what is already in the Bill and where it cross-references.

There is a second issue. The new clause would impose an obligation on employers to use the same payment methods as the board. I am sure that those who drafted it did not intend it to do that either. I understand the concern that the new clause is intended to deal with. Hon. Members are trying to ensure that claimants can collect their money from the post office, as they do now, and that they are not forced to use bank accounts if no suitable accounts are available. I explained in Committee that the amendments tabled there would not have delivered that end. I am now explaining that these amendments will not do so either.

Hon. Members talked a lot about burdens on the employer. The new clause would impose an obligation on employers to make all working tax credit payments payable by them by order book or through suitable post office accounts. The working tax credit is paid by the employer. The payment goes from the board to the employer and then from the employer to the employee. The new clause would have that effect despite the fact that the employer would normally pay the employee's wages either in cash or into a bank account and that is what the employee expects. I find it hard to believe that the intention was to impose such a restriction, although the hon. Gentleman has confirmed that that is the case. I can assure him that the new clause would have such an effect.

The main thrust of the new clause is to enable claimants to continue to receive payments by order book. That would limit the choice of payment methods already available to and used by benefits and tax credit claimants alike.

My key objection to the new clause is that it would prevent claimants from receiving their payments by any method other than order book or through an account at the post office, even if they chose another payment method. It must be remembered that tax credits are paid to a broad range of families, many of whom already have bank accounts, are accustomed to using them and would expect to be able to continue to do so. Many other families will want to receive payments in that way. The new clause would prevent them from doing so.

I made it clear in Committee that a move away from familiar payment methods must be accompanied by suitable alternative methods of payment for the most vulnerable members of society. As I said, the regulations to determine payment methods will deal with exactly that point. I was asked by the hon. Member for Northavon (Mr. Webb) whether the Prime Minister's commitment that people would still be able to collect cash from a post office via the universal bank would be an option. I confirmed that it would. Not only is the new clause unnecessary because the assurances have been given but should it be carried it would narrow choice and increase the burdens on employers, which hon. Members say they wish to reduce.

Hugo Swire (Conservative, East Devon)

Will the hon. Lady give way?

Dawn Primarolo (Labour, Bristol South)

I am happy to give way to the hon. Gentleman but hon. Members have already said that they want to discuss at length other new clauses. I will give way but out of respect to the House I need to try to put on the record the answers to the questions that so many hon. Members have asked.

Hugo Swire (Conservative, East Devon)

It is true that many of the recipients of credits and benefits already have a bank account, but according to the Institute for Fiscal Studies extending the principle of tax credits to couples and individuals without children will bring an extra 250,000 single mothers and 170,000 working couples into the regulations. The IFS believes that in total almost 6 million households will receive some form of support. The number of people entitled to the benefits will rise by a large amount. Does the hon. Lady not concede that many of those people will not have, and will never have had, a bank account?

Dawn Primarolo (Labour, Bristol South)

I am not sure whether the hon. Gentleman was listening. I said that we needed to provide choice and to ensure that other payment methods were available for those who had no access to bank accounts. Indeed when we discussed fraud in Committee, every Committee member accepted that the best way to minimise fraud and to ensure that the money went to the family or individual who was entitled to it was to have a secure payment method. We need to balance a secure payment method with ensuring access. That is what the regulations will provide for.

As part of that—I said it in Committee—we are working closely with the Post Office and the Department for Work and Pensions to ensure that a suitable alternative will be available. The powers in the regulations are permissive ones designed to deliver that. The Bill provides the power to make the regulations on the manner of direct payment—that is all.

If new clause 2 were part of the Bill, it would restrict entitlement. The new clause and amendment No. 15 would reduce freedom of choice at the same time as putting more burdens on businesses by requiring them to have two methods of payment: they will have to issue an order book, or pay into the post office account. That is clearly daft. I hope that the hon. Member for Somerton and Frome will agree to withdraw the new clause as it is fatally flawed. 4.15 pm

Amendment No. 13 attempts to impose a duty on employers to consult with employees to see whether they would prefer to receive their working tax credit directly from the board rather than through the payroll. It is supported by hon. Members who just a few minutes ago were complaining about burdens. Now they are saying that employers must consult their employees.

What is interesting about the amendment is that it does not say what employers would have to do once they had consulted. Presumably, they would have to start printing order books, if it is linked to new clause 2.

Amendments Nos. 14 and 16 are another attempt to raise the issue of burdens on employers, which we discussed at length in Committee and during debates on the Bill that preceded the Tax Credits Bill. Amendment No. 14 has the dual purpose of requiring the board to reimburse employers for the costs they incur in paying working tax credit to employees, and of exempting employers with 20 or fewer employees from paying the tax credit, whereas amendment No. 16 aims to exempt employers with fewer than 15 employees.

As I pointed out in Committee, the Government are not attracted to that idea at all. The tax system does not provide for a direct subsidy or compensation to employers to fulfil their obligations in relation to tax. However, as I said at length in Committee—I will spare the House the long list—in a number of areas the Government have introduced reforms to reduce burdens, to simplify the operation of PAYE and to assist small businesses in particular. All that has been accepted and welcomed but ironically the amendments put more burdens on employers.

Let us consider the proposal to reimburse employers. What do we reimburse them for? An employer may have 20 employees with only one receiving a tax credit. How do we calculate exactly how much compensation should be paid? What information would we have to ask the employer to give us, so that we could calculate the compensation?

One amendment seeks to exempt employers with 20 or fewer employees and another those with 15 or fewer employees. I think that about 85 per cent. of employers are in businesses with 15 or fewer employees and 95 per cent. are in businesses with 20 or fewer employees. What would happen if a business had 16 employees and the exemption was for businesses with 15? Would it be asked to fill in loads of forms and send in loads of returns? Would it be sent loads more forms back? That would increase the burdens on that business. It has been demonstrated that paying the working tax credit through the wage packet will be simple. It supports the transition into work and assists employees and employers.

The hon. Member for Mid–Worcestershire said that the road to hell is paved with good intentions. The Opposition may have been full of good intentions but their amendments are a disaster. They are a disaster for claimants because they would restrict their choice and remove our ability to respond in an emergency by, for example, paying a claimant by giro. They would be an utter disaster for employers, who would have to consult, decide what to do, print order books, make arrangements with the Post Office in case that is where the claimant wanted the money to go, and let us know whether they had 14, 15, 16, 20 or 21 employees, depending on which bit of the system they came under.

These are totally disruptive amendments, and I am happy to send a much longer explanation to the hon. Member for Somerton and Frome of why his good intentions do not work. I urge my hon. Friends to oppose the new clause and amendments because they are simply daft.

David Heath (Liberal Democrat, Somerton and Frome)

Until latterly, we had rather a good debate. [Hon. Members: "Hear, hear."] Any debate which has the spokesman for the Conservative Opposition standing at the Dispatch Box and supporting collectivism and workplace ballots and expressing suspicion of the CBI shows that we live in a topsy-turvy world.

I am grateful to all those who expressed opinions in the debate, particularly my hon. Friend the Member for Teignbridge (Richard Younger–Ross) who did a good job describing the difficulties that small businesses will experience. The hon. Member for Mid–Worcestershire (Mr. Luff) talked about the law of unintended consequences and my new clause assisting post offices, but that was certainly not an unintended consequence. It was absolutely the intention of my new clause not only to extend choice but to protect the sub-post office system.

What are we to make of the Minister's response? She said as her parting shot that she would write to me at length and I look forward to the letter with great expectations. Other than that, her argument seems to be a simple assertion: she does not like our amendments, so they are daft. She says that with all the authority of the Treasury Bench, and we know how desperately clever the Treasury is at producing briefings on these amendments. She says ex cathedra that because she does not like the new clause, she does not believe it to be sensible or that it will work.

The Minister adduces an argument that the new clause would restrict payments only to those that could be made through a sub-post office and that it would restrict choice. I have looked again at the Bill. I see no change to clause 23 other than the paving amendment which we propose to allow for new clause 2. I see no change to clause 24 which provides the powers that she says are now curtailed. The new clause provides only an entitlement to receive the cash over the counter in a post office. That seems a perfectly sensible and proper proposal.

The Minister asserts, secondly, that the universal bank will be in operation in April 2003. I desperately hope she is right, but I am sick and tired of hearing Ministers assert with no evidence that the development of the universal bank is anything like at the stage it should be if it is go live in April 2003. If it is not, the mechanisms in the Bill will be inadequate and the Minister has no plan B. That may be of no great concern to the Government or the Inland Revenue, but it is of enormous concern to people who need that facility through their post office and to those who are trying to make their businesses in those post offices work, but who will not have the income they desperately need to maintain the network.

For those reasons I reject the Government's simple assertions and seek the advice of the House on the merits of new clause 2.

Tom Brake (Liberal Democrat, Carshalton and Wallington)

On a point of order, Madam Deputy Speaker. I understand that at 3.30 pm today a press release was issued, announcing that the Government were to proceed with the public-private partnership for the London underground. Is that not a contempt of the House, given that the Secretary of State for Transport, Local Government and the Regions is due to make a statement at 7 o'clock this evening?

Sylvia Heal (Deputy Speaker, Halesowen and Rowley Regis)

I remind the hon. Gentleman that what he says is correct: Mr. Speaker has agreed to a statement by the Secretary of State for Transport, Local Government and the Regions at 7 pm this evening.

New Clause 6 — Aggravated tax credit fraud

James Clappison (Conservative, Hertsmere)

I beg to move, That the clause be read a Second time.

Sylvia Heal (Deputy Speaker, Halesowen and Rowley Regis)

With this it will be convenient to discuss the following: Government amendment No. 23.

Amendment No. 3, in clause 33, page 21, line 40, at end insert—

'(3) The Secretary of State shall within one year of this section coming into effect and every year thereafter lay a report before Parliament on—

(a) the extent of fraud in claims for tax credits, and

(b) the measures he has taken to deal with fraudulent claims for tax credits, including measures to facilitate the early detection and prevention of such fraud.'.

Amendment (a) thereto, in line 3, after "credits", insert—

', including the estimated extent of fraud as a proportion of all error in such claims,'.

James Clappison (Conservative, Hertsmere)

I shall briefly consider Government amendment No. 23 first, as it deals with a subject that is slightly different from the provisions on non-compliance. We welcome the amendment and we are grateful to the Paymaster General for writing to us about it. The change in the wording of clause 31 will be advantageous and fairer to employers, especially small employers. I ask the indulgence of the Financial Secretary to the Treasury and the House in permitting us modestly to claim some small credit for bringing that about by raising the issue in previous debates.

In Committee, we drew attention to what would have been a significant tightening-up of the provisions, which would have been a considerable imposition on employers. Following that scrutiny, it emerged that the situation that would have prevailed had the Bill been passed unamended would have been even worse than we originally thought. That point was disclosed in a letter from the Financial Secretary.

When we originally raised the issue, we were worried that the clause would extend liability for innocent errors made by employers—acts and omissions on their part—that were neither fraudulent nor negligent but that would have resulted in the imposition of penalties on employers. In the letter, it is revealed that it would have been even worse than that, because the liability would have gone further.

The Financial Secretary wrote that the clause

"would allow a penalty to be imposed on an employer even if the incorrect payment of tax credit was attributable to an innocent error on the part of the employer or for some other reason outside the employer's control."

That means, quite simply, that an employer could have faced a significant penalty—a particularly significant penalty for a small employer—for something that had nothing to do with him and that was the result of someone else's actions. That would have been a serious state of affairs. Government amendment No. 23 puts it right, and we welcome it.

However, we add this sentiment, which is apt in the circumstances. It is a pity that we could not have extended to the rest of the Bill the detailed scrutiny that we were giving to the parts that were considered in Committee, to discover what other pitfalls there may have been. The Government amendment has emerged as a result of that scrutiny. We can only express the hope that there are no more pitfalls awaiting small employers or anyone else.

I now come to the meat of this group of amendments and the new clause: fraud. We believe that fraud within the tax credit system is a serious issue, and that the starting point for that issue is a proper assessment of the extent of fraud in the existing tax credit system. Quite simply, we need to know how much fraud there is within tax credits.

We have been asking that question for some time and, sadly, we are no closer to receiving a straightforward answer from the Government today than we were when we began asking the question. We would like to know, for example, whether the Government themselves know how much fraud there is. If they do, will they tell the House?

I asked the Paymaster General that question in March 2001, during a debate on the uprating of tax credits. She kindly agreed to write to me and she was as good as her word. She wrote in April 2001 and told me:

"The Inland Revenue are carrying out a benchmarking exercise to establish the level of fraud in tax credit claims. This began in September 2000 and will run for twelve months. The results will be used to ensure tax credits compliance work is carried out in the most effective way."

Taking the Paymaster General at her word, on 15 October I tabled a parliamentary question, to ask what assessment Ministers had made of the extent of fraud. I received a reply in a written answer on 18 December. You might think, Madam Deputy Speaker, that from 15 October to 18 December was a rather long time to wait for a written answer, but I was treated better than the right hon. Member for Birkenhead (Mr. Field), because the answer that I eventually received was grouped with a question that he had originally asked back on 28 June, on much the same subject. Anyway, this is what I and the right hon. Gentleman were told on 18 December:

"The Inland Revenue is currently undertaking an exercise to benchmark the level of fraud within the working families tax credit. The full results of this will be known early next year."—[Official Report, 19 December 2001; Vol. 377, c. 323-24W.]

Well, here we are, early next year as it was then, and in Committee we had the opportunity to ask—at an appropriate time, it would seem—about fraud. We asked the same question, but without any greater success in getting an answer. We have been mulling over what the Paymaster General said in Committee:

"On the benchmarking report, I told the hon. Member for Hertsmere that the Inland Revenue are considering the details and a report will come to me. It is already using that information to inform people about the new provisions. I cannot give him a guarantee that I will be able to publish that information because it deals with specifics of possible frauds that it would be unwise to put in the public domain. However, I will consider how to ensure that he is properly informed so that he can discharge his parliamentary duties."—[Official Report, Standing Committee A, 24 January 2002; c. 239.]

Since then I have asked a further parliamentary question. I know that the Government like to control everything these days, but I would like to be the judge of how I discharge my parliamentary duties and I am afraid that the answer I have received from the Government does not enable me or anyone else to discharge their parliamentary duties. I was told:

"The Inland Revenue are currently analysing the data from their compliance benchmarking exercise. We shall be considering the results, and questions of publication, within the next few months."—[Official Report, 5 February 2002; Vol. 379, c. 851W.]

I have been asking the same question for roughly a year. I have been taken through to the time when the Inland Revenue exercise concluded, at the end of September. We were no wiser at the end of that. We were no wiser as a result of asking the parliamentary question in December 2001. We were no wiser after the Committee, and we are no wiser after this most recent written answer. I do look to the Financial Secretary for an answer today.

Given the speed with which the Government are changing the tax credits system and the way in which new tax credits are constantly emerging, I am very worried that this tax credit will be abolished before we have the chance to know how much fraud there was in it. We shall move on to the next tax credit and we shall be told about that, that the Government are conducting a benchmarking exercise and it is too early to say what its results are. We need to know today from the Financial Secretary.

Mark Hoban (Conservative, Fareham)

My hon. Friend has set out a sorry tale of delays and prevarication by the Government. Might he perhaps be tempted to explain to us why he thinks that the Government may have prevaricated in providing that information to the House to enable hon. Members to make a judgment as to the extent of fraud in that system?

James Clappison (Conservative, Hertsmere)

A variety of explanations were put forward in Committee, but my hon. Friend assumes in his question that the Government themselves know, so it would be good to have a straightforward answer from the Financial Secretary whether he knows the outcome of the benchmarking exercise carried out by the Inland Revenue. Does he know how much fraud there is in the working families tax credit?

If the Financial Secretary does know, would he tell us whether he will kindly put that figure in the public domain? I am not asking him to clarify what was said in Committee by the Paymaster General. To summarise, she said that the Government were afraid of encouraging people to commit fraud by giving away too many details. Well, we are not asking how to commit fraud. We are not asking for details like that. We are simply asking how much fraud there is. If it is the Minister's argument that it would be dangerous to say how much fraud there is, that in itself would be a very strong temptation to people to commit fraud if they heard something like that coming from the Government. It is hardly a ringing endorsement of the invulnerability of tax credits to fraud.

The same argument has not applied to fraud in the benefits system. At the most recent Work and Pensions questions we were told by the Secretary of State himself, I believe, how important it was to know how much fraud there was in the benefits system. The same considerations apply to the Tax Credits Bill, so today we are looking to the Financial Secretary to give us some straightforward answers to straightforward questions.

Knowing how much fraud takes place is very important, but that is only a starting point; it is also important to find out what is being done about it. That brings me to amendment No. 3, in which we propose that we have a report every year on the extent of tax credit fraud, so that we know what is happening. We would have a starting point—we would know how much fraud there was to begin with. We would know what measures were being taken to deal with it and, as a result of that report, we would know each year what progress was being made in dealing with fraud.

The Government said in the 1998 Green Paper on fraud that that scenario would be desirable. They said it is important to have better information about the extent of fraud and then to discover what is being done about it. In Committee, the Paymaster General told us that early detection is important to stop abuses that may arise in the system. We agree with her, so that would be specifically required under amendment No. 3, which, we hope, will find favour with the Financial Secretary for that reason.

We believe that much more can be done. In Committee, we explained how we would like tax credit fraud to be tackled. We would like better co-ordination between Departments and between local and central Government, greater co-operation between the public and the private sectors and as much involvement from the public as possible in providing information. We welcome the fact that there has been a significant public response to the benefit fraud hotline.

I was told in a parliamentary answer last week that the public had communicated to the Inland Revenue, through the benefit fraud hotline, 16,676 allegations of improper applications for the working families tax credit and disabled person's tax credit. We welcome that public-spirited co-operation from people who share our concern that fraud should be dealt with effectively. I do not know how the public would respond to what the Government have done in relation to that public willingness and spirit of co-operation.

Hugo Swire (Conservative, East Devon)

Will my hon. Friend give way?

James Clappison (Conservative, Hertsmere)

I shall give way, but my hon. Friend may want to ponder on the statistics showing what the Government have done. We have heard what the public have done—they have made more than 16,000 allegations. However, I was told, by way of a written parliamentary answer, that there were 530 recoveries—presumably, recoveries of incorrect payments—18 penalties, which are financial penalties, and 2 prosecutions, even though 16,676 allegations were made to the hotline.

Hugo Swire (Conservative, East Devon)

In developing that theme, I wonder whether part of the problem is that those who run the fraud hotline do not feel that they are given enough support. I suggest that because I have a letter from my constituent, Julie Embling of the Acorn kindergarten in Exmouth, Devon—I wrote to the Under–Secretary of State for Education and Skills, the hon. Member for Bury, South (Mr. Lewis), in November asking for a reply, but I have yet to receive one—who maintains that, in running her small private school, she is owed about £2,000 a year by people claiming the working families tax credit who do not pay it on to her. She spoke to someone at the fraud hotline about her recurring problems and was told that child minders, nurseries and pre-schools are suffering financially from that nationwide problem. Those at the hotline suggested that she write to me as her Member of Parliament to try to persuade the Government to change the laws on the working families tax credit.

James Clappison (Conservative, Hertsmere)

I am grateful to my hon. Friend for making that point. I am sure that his constituent will be as interested as we are in the consequences of these proposals. She will also have in mind the recent experience of fraud involving individual learning accounts. Innocent providers lost out under that system, as did the people who were innocently trying to obtain education and training, because of the disruption caused when it was suddenly discovered that large-scale fraud was taking place and the Government had to bring the system to an ignominious halt. We are trying to prevent something similar happening again by having a thorough and proper debate on fraud.

We are not impressed by the number of prosecutions for working families tax credit fraud. We do not suggest that that is the only way to tackle fraud, but we would like people who knowingly commit fraud, especially those who commit the most determined fraud—I shall deal with that in speaking to new clause 6—to be prosecuted for a serious criminal offence. We suspect that many people who could be prosecuted are not being prosecuted.

Altogether, in the two years that the working families tax credit has operated, there have been only 28 prosecutions. There has been a recent spurt in the number of prosecutions—it may be entirely coincidental that questions have been asked about that—but the figure is still low in relation to the size of the system, the number of people claiming and the amount of fraud in other parts of the benefits system. I emphasise that we, like members of the public, are interested in prosecuting people who commit serious fraud and in dealing with them severely.

New clause 6 is designed to create an offence of aggravated tax credit fraud for those who repeatedly commit fraud or obtain large sums. Those determined fraudsters need to be dealt with more seriously. We need to decide how best to protect the interests of taxpayers and the majority of tax credit claimants who are honest and who also believe that the fraud is unacceptable. They want us to get to the people who commit serious frauds to obtain a large amount of money or who defraud the state again and again.

Treating such offences more seriously would be in line with what the Government are trying to do in other parts of the benefits system. The Social Security Fraud Act 2001 tackles fraud in other benefits. It received Opposition support and removes benefits from people who are repeatedly convicted of offences. There is a widespread desire to ensure that those who commit the most serious frauds are dealt with more strictly.

We have asked many questions about fraud and want straightforward answers. It is time that the Government came clean. They should tell us what the level of fraud is and set out more clearly what they intend to do about it. We will continue to press for answers.

Steve Webb (Liberal Democrat, Northavon)

I congratulate the hon. Member for Hertsmere (Mr. Clappison) on his assiduous studying of the Bill in Committee which led to the correction set out in Government amendment No. 23. I wholeheartedly associate myself with his comment that large chunks of it were not scrutinised because of the tight timetable. It would be regrettable if other aspects of the Bill were not picked up on. I hope that the Government take a lesson from that the next time they programme our discussions. They should realise that it is in their interests to have proper scrutiny. Indeed, we would all benefit in such circumstances.

Frank Field (Labour, Birkenhead)

The hon. Gentleman says that that would be in the Government's interests, but would it not be in the taxpayers' interests?

Steve Webb (Liberal Democrat, Northavon)

This is a win-win situation. It is in all our interests that there is proper scrutiny. However, the Government's reputation for producing good legislation is damaged if Bills are not properly scrutinised and have to be corrected later on. So I welcome Government amendment No. 23 and the process by which it came about.

I also welcome the suggestion in amendment No. 3 and amendment (a) that there should be annual reports on the extent of fraud, what is being done about it and how it contributes to the total error in claims. My slight hesitation is that a detailed exposition of what is being done to tackle fraud might show our hand too much, but the request for information on the scale of fraud and the overall progress in tackling it would be welcome.

I will be interested to hear the Financial Secretary's response to new clause 6. We all agree that fraud is a bad thing and that repeated or large-scale fraud is even worse. There is only one question, therefore: what is the appropriate penalty? When my colleagues and I ask whether a proposed penalty, of whatever magnitude, is not serious enough or too serious, it is sometimes suggested that we either approve of the crime or are not tough enough. We want such crime punished properly, but does new clause 6 set out the right punishment? The hon. Member for Hertsmere did not try to justify the specific tariff or degree of severity that it sets out, which is why I have an open mind about whether to support it.

My instinct is to be slightly nervous of the severity of the proposal. I do not understand the legal system enough to understand the precise implications of new clause 6(2)(b) and its reference to conviction on indictment. However,

"imprisonment for a term not exceeding fourteen years"

strikes me as an extraordinarily long period.

We have a scale of relative importance of different offences. To draw an analogy with recent news items, it was suggested that those who take mobile phones off people in the street should face four years, or something like that, in the slammer; at that point, someone came on the radio and said, "But something much more serious was done to me, and the person who did it only got 18 months." No one disagrees that the act is wrong; the question is where it fits into the scale of seriousness of offences and penalties.

James Clappison (Conservative, Hertsmere)

I am listening with great interest to the important points that the hon. Gentleman is making. The purpose of setting a maximum sentence is to cater for the worst type of offences. The new clause is in effect saying that offences with such aggravating features are the more serious type of offences.

It might interest the hon. Gentleman to know the current state of affairs regarding those who have already been prosecuted for working families tax credit fraud—an offence that currently attracts possible imprisonment. Only seven people have been sent to prison for such offences, and a written answer that I received suggests that some of those people may also have been involved in offences of another type.

Steve Webb (Liberal Democrat, Northavon)

I am grateful for that intervention, and I understand that we see only the maximum in the new clause. However, I cannot help reflecting on a dreadful constituency case in which a teenager was murdered and the murderer was given 12 years. I find it hard to understand the relative figures when it is suggested that a fraudster—even a serious tax credit fraudster—should be given 14 years. That is not to say that the offences are not serious, or that the sentences are not serious enough. I just wonder about their relative position in the scale of penalties for offences.

I look forward to hearing the Minister's comments. We all agree that tax credit fraud should be cracked down on, but, in passing, I observe that the proposals about not putting the money through the pay packet would have worked well in the context of the current group of amendments. The ability to pass money through the books of a firm is an open invitation to fraud if the firm wants to collude with its employees. Direct payments to the individual are far less prone to organised fraud of that sort.

I welcome the fact that the Conservative amendments turn the focus to fraud. Regular reports to Parliament would be welcome, but I have some reservations about the extent of the penalties proposed in new clause 6.

David Ruffley (Conservative, Bury St Edmunds)

I support new clause 6. It is necessary because the regime to be introduced by the Bill will make fraud easier than it is under the system to be replaced.

In 1999, the Select Committee on Social Security said that there were

"serious concerns . . . about the increased potential for fraud in Working Families Tax Credit as compared to Family Credit."

That Committee suggested, and I agree, that a straightforward benefits system was less susceptible to fraud than a tax credit system. I venture to suggest that one of the reasons why the questions asked by my hon. Friend the Member for Hertsmere (Mr. Clappison) about the level of fraud under working families tax credit have not been answered is that those answers would reveal a higher incidence of fraud under the tax credit system than under the family credit system that it replaced.

Why should that be embarrassing to the Government? The answer is not far to seek: the working families tax credit system and the tax credit system to follow from the Bill was an idea of the Chancellor of the Exchequer and Her Majesty's Treasury. The system is manifestly not only more complicated, but more susceptible to fraud.

The questions that I have posed about increased susceptibility to fraud have been borne out by international experience across the Atlantic. The Canadian working income supplement, a tax credit system not unlike the one that the Bill seeks to introduce, has been a disaster. It has resulted in increased fraud and has led the Canadian authorities to the inescapable conclusion that they should scrap it and return to a benefit-based system. Equally, in the United States, the Internal Revenue Service is beside itself at the amount of fraud perpetrated under the earned income tax credit system, which is the key model for the Treasury's working tax credit and, before that, the working families tax credit. The figures speak for themselves. In early 1997, the taxpayers of America lost more than $4.4 billion as a result of fraud in the earned income tax credit system, mainly because of poor certification—in fact, it is virtually non-existent—of hours worked in employment. The Economist observed:

"There is no longer a consensus that the earned income tax credit is a sensible addition to America's anti-poverty programmes."

New clause 6 has a clear intention; it will introduce serious penalties for aggravated fraud. The system that the Bill will introduce provides more scope for the fraudster, chiefly because of the annual basis of assessment, which contrasts with the much shorter periods required for income support and the six-month assessment period for working families tax credit. If a claim is made before the beginning of a tax year for the following tax year, the claimant may have to calculate in his annual assessment what he thinks his income will be for the next 12 months. If there is a change in his circumstances, that will not be assessed automatically before the 12-month period is up.

The Institute for Fiscal Studies said that that is self-evidently loopy, as there is no comparable system in any other benefit regime; it does not think that such a period of assessment has previously been introduced without serious reassessment of the claimant's benefit within 12 months. From the Bill, it is clear that the Government seek to get round that by arguing that if there is a change in someone's circumstances, their case could be reopened. If someone gets a lot more money during the year, there will be a reassessment of the amount of benefit that they receive. However, within certain thresholds, the Government will choose to ignore any change in circumstances. We are told that there will be a threshold above which certain amounts of increased income will be ignored by the authorities, thus leading demonstrably to overpayment. That is what the disregard in the threshold means; someone will get more benefit under the new system than they otherwise would.

The Institute for Fiscal Studies thinks that that is a bit peculiar, but it becomes even more peculiar when we realise that we have not been told what the threshold is. Extraordinarily, all that we are told is that thresholds will be set by regulation; we do not know how much increased income will be disregarded or, in other words, constitute a benefit overpayment. In those circumstances, there is considerable potential for fraud. It may be argued that there will be powers to seek repayment of overpaid benefit at the end of the tax year, but that overpayment has to be detected. I know that my hon. Friends did sturdy work in Committee, questioning the ability of the authorities to get repayments made when overpayments have occurred in year.

At the beginning of a tax year, when information is given to the Inland Revenue about future income for the next 12 months, there is an in-built incentive to underestimate the amount forecast by the taxpayer. An answer to that conundrum has not been forthcoming from the Government and still causes great concern to the Institute for Fiscal Studies.

What about the ability of the Inland Revenue—not the Department for Work and Pensions any more—to police the new regime that the Bill seeks to introduce? I reiterate the powerful points made by my hon. Friend the Member for Hertsmere, because I fear that Ministers on the Treasury Bench may try to wriggle out of the question. In the letter that the Paymaster General placed in the Library, she stated:

"The Inland Revenue are carrying out a benchmarking exercise to establish the level of fraud in tax credit claims. This began in September 2000 and will run for 12 months. The results will be used to ensure tax credits compliance work is carried out in the most effective way."

What is the number of cases that have given rise to criminal proceedings as a result of that study?

That is a perfectly simple question. I hope that we will get an answer. During the speech of my hon. Friend the Member for Hertsmere, the Parliamentary Private Secretary scuttled no less than twice to the Box to get bits of paper. Much agitation was evident. I sincerely hope that the Financial Secretary has done his homework and that he will provide an answer to a question that was raised in Standing Committee—an answer that has been asked for twice, including my questioning now, in the Chamber today. It should not be terribly difficult, and it should be something that we have a right to know.

The Financial Secretary may smirk away. Someone once said of his general performance:

"We have seen the future; and it smirks",

which, I think, is a variation on a quote from the Webbs. The right hon. Gentleman should not smirk. He may congratulate me on what he considers to be an amusing joke. I find it not so much amusing as worrying that he can laugh about a taxpayer issue. The right hon. Member for Birkenhead (Mr. Field) said that it is the taxpayer who is losing out as a result of fraud, and I suggest to the Financial Secretary that the taxpayer deserves some answers today.

The Government have the technology to calculate the number of cases that have been caught and the number of criminal proceedings that have been brought. We know that the Government can have access to that information because in her letter on 11 April 2001, which is deposited in the House of Commons Library, the Paymaster General tells us that between April 2000 and February 2001 approximately 29,000 working families tax credit and disabled person's tax credit investigations were completed, and about 300 penalties were imposed. If she can find the information for that period, why on earth can she not find it for the 12-month period about which she promised to tell us? Those facts need to be put on the record by Ministers today.

I try not to think too ill of my fellow man, in the inclusive Conservative party that my right hon. Friend the Member for Kensington and Chelsea (Mr. Portillo) has done so much to influence over the past few weeks. I do not want to resort to cheap rhetoric about benefit frauds, cheats and scroungers. We are seeking as a party to condemn a little less and understand a little more. So I want to be very gentle in making my point: I think that it is highly unlikely that the number of serious fraud cases that relate to working families tax credit and in which penalties are justified amounts to only 300 in one year. That is the number given in the Paymaster General's figures, but it seems remarkably low, so I repeat that we need the figures that she undertook to give to us.

In conclusion, I should like to make a more general point about fraud, not least in relation to that which is endemic as a result of having a tax credit system, as opposed to a straightforward benefit system and family credit. Apart from housing benefit, the two most vulnerable benefits in terms of fraud are jobseeker's allowance and income support, which are both folded into the working tax credit and child tax credit that are at the core of the Bill. On 20 December 1999, Lord Rooker, the then Minister of State, Department of Social Security, told the House something very interesting. He said:

"Previous estimates have shown that £2 billion a year has definitely been lost through fraud. A further £3 billion may have been lost in cases where fraud is strongly suspected".

On top of that lot, he referred to

"a further £2 billion where there is some suspicion of fraud."—[Official Report, 20 December 1999; Vol. 341, c. 323W.]

Those figures have been estimated to be somewhat on the low side, not least by my right hon. Friend the Member for Haltemprice and Howden (David Davis) when he was Chairman of the Public Accounts Committee. That estimable Committee suggested that, in total, social security fraud cost the average family about £500 a year. That is the scale and magnitude of the problem with which the Government have to grapple. Of course, the predecessor Administration also had to grapple with it. However, this Bill seems to encourage a lax culture in terms of application for the two credits. There is the disregard of increases in income, about which the authorities are saying "Don't worry about that, we'll overpay you." A new regime is being introduced in which the arrangements are more complicated and it will be more difficult for people to get the right answers. It will, therefore, give fraudsters more scope to try things on and claim that they were confused—a point that has been rather sagely made by the Institute for Fiscal Studies. For those reasons, as well as that which has already been mentioned—the secrecy with which Ministers are treating the information about the level of fraud in working families tax credit and tax credits in general—I urge the House to support the new clause and the associated amendments tabled by my hon. Friends.

Frank Field (Labour, Birkenhead)

I rise to speak to the amendments in the group to which I have appended my name. I do so for one very simple reason: when the Opposition were in government, they were, at least in my view, open to the charge of being soft on fraud and soft on the causes of fraud. I hope that those on the Front Bench will accept the amendments, as I would not want us to go into an election with that charge not only being pinned to us, but being widely believed by the electorate.

I want to support my right hon. Friend the Financial Secretary and again emphasise to the House the difficulties that he has in trying to ensure that the civil service machine is as effective as we want it to be in countering fraud. It is not part of my normal behaviour to attack civil servants either generally or individually, but I can say that the main culprits are not in the Box tonight and that I am thinking about the generalities and not about individuals.

Two examples might suggest that the machinery supporting the Government is not as anxious to counter fraud, or to take notice of the will of the House, as it should be. I have already cited the first example. I had responsibility for fraud for about 13 weeks, and decided that we should undertake an inquiry into the patterns of fraud in family credit. That information would be made known to the Treasury so that when it came to plan the working families tax credit, it could at least design out of the new benefit the easy means to fraud that were present in the family credit system. As is known, a successor Minister has told the House that the papers carrying my decision have gone missing. That hardly suggests that there is mega-support in some Departments for countering fraud.

The second example has also been cited. Attempts to get information about the extent of fraud through a parliamentary question tabled in my name took six months to elicit a reply. Again, that hardly suggests a group of people actively engaged in trying to protect taxpayers' money. I emphasise that point because we are not talking about our money. We are talking about a large number of people, many of whom earn low wages, who pay their taxes because they believe that they should. We have an equal duty to ensure that the money raised from those people, whether rich or poor, is spent in the way in which the House requires.

If we are casual with that responsibility, in the long run there will be even less support in the House for welfare measures than there is at the moment. So, if we cannot do this for the proper reason, we should do it for another reason—namely, because those of us who are interested in ensuring that those at the bottom of the pile get a slightly better deal than they would if there were no Government intervention want those programmes to be protected.

James Clappison (Conservative, Hertsmere)

Just before the right hon. Gentleman moves on from that point, it is worth bearing in mind the answer that he received to his parliamentary question. It stated that

"it is not possible to answer specific questions about the proportion of the Inland Revenue's compliance costs that relate to Tax Credits."—[Official Report, 19 December 2001; Vol. 377, c. 324W.]

It took the machinery that he has described six months to tell him that it did not know the answer.

Frank Field (Labour, Birkenhead)

I hate to say this, but the Treasury looks good in this regard compared with the Department for Work and Pensions. I recently received a reply to a letter that I had sent to that Department nine months earlier. It had a "roller-towel" answer similar to the one to which the hon. Gentleman has just referred. All this suggests that, despite the Government's wish to counter fraud, that wish is not being backed up with resolute action by all civil servants. For the reasons that I have briefly outlined, therefore, I hope that when my right hon. Friend the Financial Secretary to the Treasury comes to reply, he will not surprise the House or taxpayers, and that he will express the Government's intention to adopt the amendments.

Mark Field (Conservative, Cities of London and Westminster)

rose—

Frank Field (Labour, Birkenhead)

I give way to my namesake.

Mark Field (Conservative, Cities of London and Westminster)

I thank the right hon. Gentleman—perhaps I should call him my right hon. kinsman. He has made a thoughtful contribution detailing some of the intrinsic problems that the Department faced when he was a Minister. Does he not feel, however, that an openness to fraud will inevitably be endemic in the system of tax credits? That system has been born out of a desire to push the burden of costs on to business, rather than keeping it with the Government.

Frank Field (Labour, Birkenhead)

I believe that there would still be fraud if we were operating the tax credit system in the Garden of Eden, given how easy it is to commit fraud. Hence the amendments, which are trying to send a police force into the Garden of Eden to do a bit of handiwork on the taxpayer's behalf. That is yet another reason to accept them.

I shall end on the note on which I began. In the run-up to the 1997 election, the party to which I belong was able to seize the initiative in countering fraud. Taxpayers thought that the Conservative party had totally failed to live up to its responsibilities to protect taxpayers' money. My worry is that if we are not seen to act ever diligently in protecting taxpayer's money, the charge made against the last Conservative Government—that they were soft on fraud and soft on the causes of fraud—will be made against us.

I hope that the Financial Secretary will deliver a robust response. Despite his difficulties in bringing some civil servants to heel in implementing the wishes of the House, I hope that we take an important step forward in protecting taxpayer's money and in tilting the balance towards decent citizens and against those citizens who rip us off.

Howard Flight (Conservative, Arundel and South Downs)

The Government's approach contains a genuine flaw. They have understandably chosen a system that prioritises giving people credits as they need them. That system is extremely complex. Indeed, the Financial Secretary said in Committee that it would be like a television set—people would not understand how it worked, but they would turn the knob on and off. We should consider those two points together.

The word "fraud" may be wrong, but human nature is human nature, and, inevitably, those who qualify for tax credits will develop and understand ways in which to play the system. People will work out what cannot be checked effectively or will not be checked at all. Currently, there is a marked lack of discipline in the system, and I can understand why the Government are not keen on the kind of disciplinary measures that might tighten it up. For instance, all claimants might be required to produce a detailed annual return for the Revenue, answering all the key questions about their circumstances. That would circumvent the easy argument, "I didn't really know that I had to give that bit of information, and I didn't understand." The reply to that is, "How could you? It is a very complex matter."

Alternatively, the Revenue might have to check working hours with employers. That would not solve the problem in relation to the self-employed, but, again, checking with employers, whatever formula the Government apply in relation to average working hours, would be an enormous task and yet another burden on employers. The nature of the arrangement will encourage laxity, wheezes and playing the system—not major fraud, but a culture of fraud. We have seen such things in other areas of national life. When the Government are using the taxes and money of those who are not well-off and of others, they cannot afford to have their cake and eat it. If they are to introduce a negative income tax credits system, they must also apply the disciplines that go with it.

As other hon. Members have argued, two outcomes resulted from a similar system in the United States, on which much of the Government's approach is modelled. First, costs spiralled from, I think, $1.6 billion to more than $18 billion in a decade. Secondly, some 25 per cent. of the claims turned out to be invalid. As the Bill stands, we shall go down that road. Are the Government prepared to introduce the disciplines needed to prevent the same thing from happening here?

Mark Hoban (Conservative, Fareham)

I do not wish to add a great deal more, but I want to put on record part of the debate in Committee on the message that the Government are sending out on working families tax credit fraud. I also want to explain the importance of the new clause and the amendments grouped with it, which were tabled by my hon. Friend the Member for Hertsmere (Mr. Clappison).

In a parliamentary answer covering the period from October 1999 to September 2001, it was identified that there were 52,000 investigations into working families tax credit claims, of which 8,800 resulted in recovery of an overpayment. There were 478 penalties for over-claiming, but only 22 prosecutions, of which 13 were successful. My concern is that, with so few prosecutions following so many recoveries and penalties, the message to the perpetrators was that, to echo the right hon. Member for Birkenhead (Mr. Field), the Government were soft on fraud and soft on the causes of fraud. That can only encourage fraudsters to commit further fraud, which is why I support the new offence of aggravated tax relief fraud. It is important to demonstrate that there is a stiff sanction.

It is also important, as in amendment No. 3 and amendment (a), to stress that the Government should be held to account by Parliament for the extent of fraud in the system and made to say, without giving the game away to the fraudsters, what measures they are taking to ensure that fraud is reduced. We must send out a clear message to the fraudsters, and I am afraid that the Government's track record, with so few prosecutions following so many false claims, sends out quite the wrong message.

Paul Boateng (Labour, Brent South)

This worthwhile and thoughtful debate has demonstrated the seriousness with which the whole House takes the issue of fraud. I assure the hon. Member for Arundel and South Downs (Mr. Flight) that the Government are determined to tackle it wherever and in whatever aspect of the tax and/or benefit system it appears.

I entirely reject the accusation—it was not only implicit but explicit in some contributions today—that we are not committed to tackling non-compliance in the tax credit system: we are, and I would argue that the measures in the Bill demonstrate that. The notion that the people who are responsible for administering the tax and tax credits system would glean from what some hon. Members have said today is that the House questions their seriousness of intent, which would be disappointing for a body of men and women engaged in a difficult and problematic field of enforcement.

My right hon. Friend the Member for Birkenhead (Mr. Field) clearly appreciates the balance that must be struck, whereby we need to be committed not only to deterring, detecting and reversing non-compliance but to encouraging people to take up what is rightfully theirs.

My right hon. Friend has championed that cause for many years, which distinguishes his criticisms and concerns from those of the hon. Member for Bury St. Edmunds (Mr. Ruffley), who, in an interesting reference to the right hon. Member for Kensington and Chelsea (Mr. Portillo), demonstrated that the distance between Kensington and Chelsea and Bury St. Edmunds is more than geographical.

David Ruffley (Conservative, Bury St Edmunds)

Will the right hon. Gentleman give way?

Paul Boateng (Labour, Brent South)

No, I have not finished.

The attempts by the right hon. Member for Kensington and Chelsea and his hon. Friend the Member for Buckingham (Mr. Bercow) to change the face of the Conservative party are likely to take a long time. I heard the points that the hon. Member for Bury St. Edmunds made, and I will deal with them later.

David Ruffley (Conservative, Bury St Edmunds)

On a point of information, I must tell the Minister that my reference to my right hon. Friend the Member for Kensington and Chelsea (Mr. Portillo) was supportive; I agree with his injunction that our party should be more inclusive. The Minister entirely misunderstood the point I was trying to make.

Paul Boateng (Labour, Brent South)

If what the hon. Gentleman said earlier was supposed to be supportive, I hope that I never have to rely on his support.

A delicate balance has to be struck. If the hon. Gentleman is being supportive, I hope that he will have the grace to recognise that we need to get the balance right. There is a balance between helping the compliant majority to claim and to understand both what they are entitled to and their obligations under the system—because with rights come responsibilities—and having effective remedies against those who try to abuse the system.

There undoubtedly are people who abuse the system—we all come across them from time to time in our constituency surgeries. My right hon. Friend the Member for Birkenhead and I share a common approach to theology, and we both accept that man is fallen—so, as he suggested, we will not have the opportunity to observe what would happen if the measure were enforced in the Garden of Eden. We operate in an entirely different place, and our laws must reflect the nature of that place.

Frank Field (Labour, Birkenhead)

Given the nature of the Bill, how it operates, and who is responsible for membership, will not the overwhelming majority of the fallen creatures be employers?

Paul Boateng (Labour, Brent South)

I am not sure that I accept that. There are a lot of fallen folk about, and I do not think that they are to be found in any one place or category. Even among ourselves I fear that there are some—on both sides of the House. We have to live with that fact, but our laws also have to reflect not only the reality of human nature but our need to get the balance right.

We had the opportunity to examine this issue at length in Committee, and I am rather surprised by some of the suggestions that have been made about the Bill. For example, I should have thought that the hon. Member for Hertsmere (Mr. Clappison) would welcome the fact that we recognise the merits of his amendment and the points that he made so ably in Committee. However, he seemed a little churlish—

Howard Flight (Conservative, Arundel and South Downs)

Surely not.

Paul Boateng (Labour, Brent South)

I fear so, although it was uncharacteristic. It was churlish of the hon. Gentleman to chide us for tabling our amendment. We recognised the force of his case, and I find it rather surprising that he suggests that simply because we tabled our own amendment, there may be other hidden horrors lurking in the Bill, as yet unrecognised because there has not been enough time for consideration. I would say that we gave the Bill very thorough consideration in Committee, just as we have done tonight.

Be that as it may, I would argue that aspects of the new tax credits make the system intrinsically more secure. The measure of income used is the income for a tax year, which is defined much more closely in line with tax, reducing the capacity for understating income and making it easier to cross-check income figures with tax and national insurance records. As right hon. and hon. Members know, understatement of income is a common feature of the system at the moment. It will be much harder to get away with that once the Bill completes its passage through this House and the other place.

I assure all who have contributed to the debate that our intention is that the administration of the system and the ethos that we create will develop a culture not only of maximum take-up of the system and the credit—the importance of that was put forcefully in Committee by the Liberal Democrats and my hon. Friends—but, importantly, of compliance and of intolerance of abuse. There must be a determined effort to bring to book those responsible for abuse. The regulations, and the guidance given to those seeking the credit and to those administering it, will buttress that culture.

Secondly, concern has been expressed about the child care tax credit. The ability of the new tax credits to respond to changes as they happen will mean that support for child care costs through the child care element of the working tax credit will be matched much more closely to the actual costs incurred. At the moment, support for child care depends on the situation when the claim is made; once awarded, child care tax credit stays in place for the full six months, but we are awarding that structural point. Entitlement to the child care element will stop if the use of qualifying child care stops. Of course, the corollary is that parents who are already claiming working tax credit, and who become eligible for help with child care costs, will be able to apply for it at that point.

The important point, which addresses directly the comments of the hon. Member for East Devon (Mr. Swire), is that we intend that there should be a system of rigorous spot-checks. Officials will visit nurseries to ensure compliance, so the system will not be lax or in any way tolerant of abuse. There will be checks, and we will try to improve links between the different Inland Revenue systems, which will make it harder for claimants to hide sources of income and to receive tax credits to which they are not entitled.

To combat fraud, up-front checks will be made, and the automated systems and data sources available to the Inland Revenue will be used to support systematic risk-screening techniques. My right hon. Friend the Member for Birkenhead made a very fair point—we have not always done as well as we should.

I regret any failures to answer letters and queries promptly. Right hon. and hon. Members may not like the responses that they receive, but as Members of Parliament they are entitled to speedy responses and every effort is being made to improve performance in that area.

Those checks will enable those cases that carry the greatest risk to be identified before payments are made. The Inland Revenue will then be able to carry out further checks and ask for additional information or supporting evidence from the claimant before deciding whether to put an award into payment.

The Revenue will carry out up-front checks on all claims. The initial automated risk assessment will identify claims that present a high risk of non-compliance or fraud and need immediate investigation. Those will be directed for consideration to staff in one of the Revenue's research, intelligence and analysis teams. The risk weightings used in the up-front screening process will be capable of being varied, either centrally or locally, in response to different factors such as changing perceptions of risk. I think that my right hon. Friend will accept that that is a very different attitude and approach from the one that has sometimes existed elsewhere. The research, intelligence and analysis teams will also have access to third-party information and data from other sources, such as the self-assessment system, to assist them in identifying cases.

During the year, the Revenue will carry out compliance work on cases where it suspects that an award is incorrect. Clause 16 enables the Revenue to require information and evidence to help it decide whether there are grounds for amending or revoking an award, allowing it to take effective action during the year to prevent tax credits being paid incorrectly.

Clause 18 allows the board to conduct inquiries into awards after the end of the year, enabling it to implement an end-of-year compliance regime—investigating awards, ensuring that they were correct and either amending or revoking them if they were not. The clause gives the Revenue the power to require information and evidence from any person to whom an award has been made, provided an inquiry has been opened. The Revenue may also obtain information from third parties.

In response to the hon. Member for Hertsmere, I should point out that there were more than 16,000 allegations to the hotline, but, as he will know, there were more than 50,000 investigations into working families tax credit applications. Up to November 2001, there were 50,382 investigations into WFTC applications and 1,668 into disabled person's tax credit applications. I suggest that that is not indicative of any slackness. The hon. Gentleman will want to know that we will be guided and informed by the outcome of the study to which he referred as we implement this tax credit system, and I can assure him that we will be.

On the most serious cases of suspected tax credit fraud, the provisions giving the Revenue powers to investigate fraud cases effectively are in clause 34. Clause 33, which amendment No. 3 would amend, creates a new offence of tax credit fraud. Such cases will be those where the actions of claimants are particularly offensive—the use of false documents, repeat offences, collusive employers or organised fraud by criminal gangs. Those cases will be considered for prosecution, but where they do not proceed for one reason or another, they will go back to the compliance teams at local level to be investigated and penalised. There is no question of people just getting away with it. It is not a case of, if they are not prosecuted, there is no follow-up. There will be follow-up. A clear message will be sent that fraud is simply not acceptable. That approach mirrors that for tax fraud, where similar considerations apply in deciding which cases should be subject to prosecution.

We on the Labour Benches cannot accept the notion that people who are being investigated for tax fraud, many of whom will be white collar workers or self-employed, should be treated differently from those who are being investigated for tax credit fraud, that tax credits are outside the overall tax system and that one particular group of people in society should be treated more harshly and more aggressively when it comes to prosecution than another. All people must be treated fairly. All people must understand that they have rights and responsibilities.

New clause 6 seeks to introduce the offence of aggravated fraud where the sum of tax credit at stake is particularly high or where a person has been convicted of social security or tax credit fraud in the recent past, opening the way to a higher maximum sentence on indictment.

Courts already have the power to take previous offences and the size of any fraud into account when setting sentence. We know that it is unusual for any court to pass a sentence for tax or tax credit fraud in excess of seven years, however aggravating the circumstances. Dealing with the mischief is not made more effective simply by ratcheting up the maximum sentence. That is an odd way in which to approach sentencing.

There is, however, the common law offence of cheating the public revenue: that can and will be used in appropriate circumstances. It allows the court to pass whatever period of imprisonment it feels is appropriate—there is no maximum sentence. I hope that, having considered that, hon. Members will not feel the need to proceed down the road that new clause 6 suggests. There are sufficient avenues available, and they will be used where appropriate. New clause 6 simply is not necessary.

Amendment No. 3 takes us into different territory. It seeks to impose a requirement on the Secretary of State for an annual report to Parliament on the extent of tax credit fraud and the counter-measures taken. I am not sure what it would add. The Inland Revenue already produces an annual report every year, which is presented to Parliament by Treasury Ministers. It covers, among other things, the Revenue's work on countering fraud and non-compliance across the range of its responsibilities. Since the Revenue took over responsibility for tax credits, the report has included its work on countering tax credits fraud and non-compliance. We are seeking to take a co-ordinated approach to tackling non-compliance in tax and tax credits.

The Revenue is subject to scrutiny by the National Audit Office and its board appears before the Public Accounts Committee. Treasury Ministers are, and will remain, answerable to Parliament on tax credit matters in the normal way.

I assure right hon. and hon. Members that their points about the importance of a vigorous and determined culture in relation to tax credit fraud will be taken on board. We will seek not only in debates in the House but in any other appropriate way to ensure that the House is kept informed of developments in that area.

I shall say a few words about the benchmarking study that was conducted on WFTC cases, which I know is of concern to right hon. and hon. Members. That work was undertaken as a means of evaluating the effectiveness of Revenue systems and, in particular, to inform the development of the risk assessment process. My hon. Friend the Paymaster General has made it clear that we do not think that it would be helpful to provide details of the factors that the Revenue would consider when deciding whether to take up a case. My hon. Friend has said that she needs time to consider the results of the Revenue's analysis and will consider whether it is appropriate to make any of that information available. She has heard the points that right hon. and hon. Members have made forcefully and effectively, and no doubt in due course will communicate her intentions in that regard.

This has been an important debate. We need to make sure that we send a clear message that fraud is unacceptable, that rights bring with them responsibilities and that we intend to ensure that we create a culture of compliance and determined enforcement of the tax credit system, while never forgetting that the system is designed to ensure that those who need help receive help when they need it. It is designed to ensure that we address the evils of poverty, particularly child poverty, and make work pay. In doing that, we need to be aware of the importance of combating fraud.

I hope that I have demonstrated to the House our seriousness of purpose and intent and that hon. Members will not push the amendments to a vote.

James Clappison (Conservative, Hertsmere)

This has been an interesting debate and it has ranged widely into theological questions. I always approach issues of theology and morality with a certain degree of humility and reluctance. I never like to say too much on the subject; I do not want to speculate about who is fallen and who is not fallen. In this context, I am interested only in finding out what the wages of sin are, but the Minister will not tell me. I have asked him over and over again and he simply will not say. We heard more elegant prevarication, if I may put it that way, in his speech.

I should hate to be thought of as churlish in my response to Government amendment No. 23. I hope that I commended the Minister's response in Committee. I also commend his openness in revealing through his correspondence that the situation was even worse than we thought it was, and that the good that we have done through the amendment will be all the greater. Our sadness is that we have helped the Government in this, but we have not been given the chance to help them a little more by looking at nearly half the Bill, which did not receive any scrutiny.

The hon. Member for Northavon (Mr. Webb) asked, interestingly, what the sentence should be and whether the maximum sentence was too harsh. I recommend that he look at the sentence of seven years' imprisonment, which is set for every fraud in the Bill. We are setting a maximum to deal with the worst cases of fraud—those that involve repeated offences of fraud and frauds of large sums. We would have to be realistic in considering what that large sum would be. It would be the amount that ordinary people thought indicated that somebody was profiting far too much. Some people are profiting far too much. On any view of it, the amount of fraud in the system is not reflected in the number of prosecutions. The Financial Secretary told us of the 50,000 investigations, but he did not go on to tell us that of those only 28 prosecutions were generated. The child care providers investigation did not result in a single prosecution, nor did the investigation of employers. So whatever applies to the rest of us as regards the wages of sin, as far as the Government are concerned employers are saintly and immune from sin, because employers are never involved in fraud. The Government are being complacent and we are disappointed by the Financial Secretary's response.

Clause 31 — Failure by employers to make correct payments

Dawn Primarolo (Labour, Bristol South)

I beg to move, That the Bill be now read the Third time.

I am pleased to open this debate on the Bill. I am grateful to hon. Members on both sides of the House for the detailed and constructive debates that have taken place on Second Reading, in Committee and on Report. We have been able to discuss a wide range of matters of concern to hon. Members. My right hon. Friend the Financial Secretary and I have been happy to explain the Bill's provisions, and I believe that they address some of those concerns. I am extremely grateful to hon. Members for their assistance in these proceedings and for the very thoughtful way in which they have approached the Bill, not only in challenging the Government, but in genuinely helping us to consider the issues that it raises. I shall return to a few of those points briefly.

The Bill marks another important step towards achieving the Government's aims of providing employment opportunities for all and tackling poverty. The Bill will introduce two new tax credits—the child tax credit and the working tax credit—which will provide focused and flexible support to families. There will be a single credit to support families with children and a separate credit to provide a top-up for the low paid, providing inclusive support for those facing persistent in-work poverty.

The Bill will provide the framework for the credits, as well as a further streamlining in the way that support for families is administered, through the transfer to the Inland Revenue of responsibility for child benefit under part 2. By establishing a common framework for the credits, the Bill provides an opportunity to create an inclusive system of support in which families comply with a common set of rules regardless of their income or circumstances. The detailed rules for the credits will be brought out in regulations. I was grateful for the opportunity in Committee to provide more detail on those rules. I was also grateful for the challenge set by the Opposition to respond in varied and creative ways to their insistent and creative questions on whether I was able to share details on the rates and tapers, which as the House well knows are the subject of the Budget statement.

Hon. Members expressed a desire for more detail to be included in the Bill. It provides the framework for the credits and the regulations contain the technical detail. That is the right way to introduce the reforms and is the norm for such legislation. It allows us the flexibility to adjust the detailed rules over time as we have more experience of the pattern and changing lifestyles of the families that we want to support.

However, as the hon. Member for Mid–Worcestershire (Mr. Luff) and other Committee members explained, the powers to make regulations are subject to negative resolution procedure. There is nothing wrong with that approach. Like all Governments, we try to strike a balance between the appropriate use of parliamentary time to construct a framework and the way in which we deal with the mechanical issues, which in this case relate to how the credits work.

I have given the use of regulations careful consideration. Important regulations will need to be made and I accept that it will be helpful to reconsider whether we need to use negative resolutions for every set of regulations. When we introduced the child care tax credit as part of the working families tax credit, and the disabled person's tax credit, the first statutory instruments to contain the relevant legislation were subject to affirmative resolution procedure. I will consider how we can make some of the regulations subject to the affirmative resolution procedure in the first instance, although they would have to return to the negative procedure. That reflects further the co-operative and suitable way in which the Committee approached its work.

The new tax credits will be awarded for up to a year and are based on an annual income of the claimants for a tax year. They will make the process of claiming easier and will further integrate tax credits with the income tax system. The annual framework will allow the credits to be more flexible during the year. In Committee, we discussed at length how to provide the claimant with the certainty of having a stream of income for the year while ensuring that the system was flexible enough to adjust to changes in income that were dramatic for a family. At the same time, we did not want claimants to think that every penny of change would require a notification to the Inland Revenue. We had a helpful discussion on that in Committee. I hope that the draft regulations, on which we are consulting, will be available to Members of this House. They should also be available to Members of the other place when they consider the Bill and before it returns here.

Hon. Members were concerned about the potential for overpayments to be run up, and about the complexity of the system. The annual nature of the credits will simplify the income assessment process. We will aim to make sure that in any in-year reporting of changes our desire to avoid any overpayment at the end of the year is borne in mind. When hon. Members see the draft regulations, they will realise that progress has been made to deal with those details.

The Bill also provides for the credit to contain several elements so that the level of support is dependent on circumstances. I confirm that the working tax credit will contain elements focused on helping various groups who may face in-work poverty. In particular, elements in respect of disabled workers and severely disabled adults will be included, alongside extra recognition for couples, lone parents and those working full-time hours. The working tax credit will also build on the success of the child care tax credit in the working families tax credit by providing a child care element. The basic existing framework will be retained, but the payment will be made directly to the main carer.

In considering legislation in isolation, we often forget or are not able to bring into our debates the often complex reality of people's lives. Although the nature of legislation such as the Bill is simple, the legislative drafting of simple concepts sometimes demands further explanation. When considering the main principles of the Bill, hon. Members were anxious to ensure that persons or families claiming the credit were given a simple, direct and clear explanation of their entitlement, and that requests for advice or for help in making sure that they receive their full entitlement were responded to.

I am confident that the Bill provides that framework for entitlement and strikes the right balance in respect of the problems to which my right hon. Friend the Financial Secretary spoke in the important debate on how to deal with those who commit fraud against the system. The penalties, sanctions and effective deterrents we can use against those who seek to cheat the system enable us to strike the right balance between making sure that people receive their rightful entitlements and preventing those who seek to steal the money to which others are entitled from doing so. None the less, the regime is geared towards ensuring that everyone claims their rights. The Bill strikes the right balance in respect of compliance and the provision of support to genuine claimants.

The Government are resolute in our commitment to tackle child poverty and to ensure that work pays. We have already taken more than 1 million children out of poverty. The new credits build on the successful reforms of the last Parliament: the working families tax credit, the children's tax credit, the disabled person's tax credit, and the unprecedented real-terms increases in child benefit and out-of-work benefits. Those reforms have achieved a lot in a short time, but we now have the opportunity to introduce a modern system of support that can deliver even more.

I agree with the hon. Member for Northavon (Mr. Webb): we have the opportunity to change the system radically. That is precisely what the Bill is designed to do. We should not pass up this opportunity to make a huge difference to the lives of the poorest in our society, and to ensure that their children are not scarred by poverty, grow up in poverty, and inherit poverty in their working lives. I commend the Bill to the House.

Howard Flight (Conservative, Arundel and South Downs)

We have had a constructive debate on Report and in Committee. The only sadness is that we have not discussed or focused on many parts of the Bill. The Government should have delayed introducing it until they had resolved their policy and intentions, and decided how they wanted to implement them. There are no forecasts about costs, no indication of the size and nature of the benefits and no cost analysis. As the Institute for Fiscal Studies said, the consultation process was wholly inadequate. I understand that the original numbers in the consultation document were taken out before publication.

Parliament is being asked for a blank cheque. This is a framework Bill too far, and Opposition Members do not accept that that is a justifiable approach to legislation that is likely to result in £2.8 billion of expenditure of taxpayers' money. The Bill is not in a form for it to be practicable to make a proper assessment of its proposals, either to oppose them in aggregate or support them.

As I pointed out on Second Reading, the Bill's proposals are essentially similar to the negative income tax reforms proposed more than 25 years ago by the Heath Government. As the House will be aware, a Select Committee then reported on tax credits and there was an important minority report by Labour Committee members, some of whom still serve as MPs. The minority Committee was advised by Lord Kaldor and the Child Poverty Action Group, and led the incoming Labour Government in 1974 to decide against implementing tax credits. There were good reasons of principle for that. Those principles remain valid today and are the antithesis of the fine intentions that the Paymaster General has just expressed. The Committee felt that tax credits were insufficiently focused on those most in need, that the majority of the expenditure benefited people not in poverty, that the costs were too great in relation to the benefits paid to those who were in need and that the additional revenue would be better spent on more focused measures to help people in need.

Roger Casale (Labour, Wimbledon)

I am interested to hear the hon. Gentleman repeat the argument that he made on Second Reading. Does he not accept that the world has changed enormously 25 years on? The argument for tax credits is valid today because we can no longer hope just to compensate people for being poor, on low wages or not having access to work. We have to achieve the dynamic effects that come from reconnecting people with the labour market, providing incentives to get back to work and, of course, providing proper child care and support for their children.

Howard Flight (Conservative, Arundel and South Downs)

First, I made those points in Committee, not on Second Reading. Secondly, they are points of principle, not just points of practice. Given the expenditure and the difficulties associated with the Bill's approach to addressing the problems of those most in need, the arrangements are not particularly effective. The hon. Gentleman will note that these criticisms have been made by a number of organisations that focus on poverty. There are many good things in the proposals, to which I referred on Second Reading. However, our objections of principles remain valid and have not been adequately debated—[Interruption.]

Michael Lord (Deputy Speaker, Central Suffolk and North Ipswich)

Order.

Howard Flight (Conservative, Arundel and South Downs)

In view of the many issues that have not been addressed, I suggest that the Government agree to give the relevant Select Committee responsibility to scrutinise the substantial volume of regulations that will need to be introduced; otherwise, as the Law Society has warned, many important issues and principles will not be considered properly by Parliament.

I shall focus on difficult issues raised by the Bill, many of which are issues of principle that have not been resolved. There is the simple question of how generous and expensive the child tax credits will be. The lower the level of child tax credit, the less effect there will be on reducing child poverty, but the higher the level, the greater the risk of reducing work incentives, which the tax credits are intended to increase. More generous tax credits will reduce the financial disincentives to marriage or cohabitation for parents who are jobless, but the CTC and WTC proposals will continue some of the financial disincentives of the working families tax credit to marriage and cohabitation for parents. In Committee we touched on this issue, which is acknowledged by the study sponsored by the Rowntree Trust.

Working families tax credit and child tax credit have already brought back elements of joint assessment for both married and cohabiting couples. As a result of the Bill, one partner will be liable to repay the CTC or WTC if it is wrongly paid to the other partner. That could cause a nightmare situation when couples split up. Although working tax credit will increase incentives for people to get a job, it will reduce the incentives as they earn more, and some will lose more than 90 per cent. through tax and the withdrawal of benefits. The problem of squaring incentives to work is by no means fully addressed by the Bill. Under working tax credit, as with working families tax credit, parents remain the only people who are not eligible for child care subsidies.

As I said on Second Reading, I welcome the fact that the savings rules that applied to WFTC will not apply to child tax credit, but I do not recollect the Government ever setting forth the policy on savings for working tax credit.

Both credits are complex and present people in real life with complex decisions about whether to work more hours and whether to live together or apart. There is an issue of principle as to whether Government should use financial incentives to influence people's personal behaviour in those areas.

As in Australia and Canada, payments will be based on annual income figures, but unlike Australia and Canada, in the UK the Inland Revenue will not have the necessary data for many potential claimants unless the Government adopt the suggestion that all claimants should be required to produce annual returns for the Revenue.

Major problems will remain in defining and determining cohabitation. The Revenue said that it would check whether anyone was lodging a tax return from the same address as the claimant, but care will be needed by the Inland Revenue to avoid the risk of making a wrong cohabitation decision, such that under the law a couple is deemed to be cohabiting, because there will be consequent penalties and difficulties in recovering overpayments.

The arrangements depend on a great deal of information being transferred between Government Departments, especially from the Department for Work and Pensions to the Inland Revenue. We have not touched on the question whether this is potentially in breach of the data protection legislation, if not data protection principles.

The Bill fails to ensure that a national system of credits and benefits is maintained, and it risks the possibility of disputes similar to the current threat that the Whitehall moneys financing attendance allowance could be withdrawn in Scotland. The threat exists as a result of Scottish Ministers having chosen to provide free nursing care. It is in the interests of the country that there should be one system in all of Britain to avoid the possibility of conflicts, which the drafting of the Bill has not ruled out.

The Government have not resolved the difficulty of defining minimum hours to be worked to qualify for working tax credit, or how that will be checked, if at all. Will employers be required to provide information either regularly or on a spot-check basis? We have argued very strongly—this is the main point that has been made by the Institute for Fiscal Studies—that there is no work incentive argument for providing tax credits for singles and couples without children and thereby adding about 500,000 claimants a year.

Another issue that has arisen is the fact that the Government continue to propose in the Bill what I can only call Enron-style, off-balance-sheet accounting. Some £4 billion of existing expenditure is automatically being transferred to a tax net-off, and another £2.8 billion will probably be transferred as a result of the Bill. A total of £15 billion of welfare-related expenditure will then be accounted for in terms of netting off tax receipts, rather than being shown as expenditure. The Office for National Statistics, which adopts the accounting conventions set out in the 1995 European standard of accounting, keeps the national accounts on one basis, but there are now difficulties in reconciling the Red Book with national accounts. There is no logic to justify taking the proposed approach other than that of seeking to conceal the extent of such expenditure.

It has emerged from this debate that at the heart of the issue are our concerns about the complexities of the arrangements and our anxiety that the need for claimants to keep detailed records and monitor the number of hours worked, the amount of income earned and child care costs will lead to a much-increased risk of non-compliance. The right hon. Member for Birkenhead (Mr. Field) was more constrained today, but as he has warned previously, the arrangements in the Bill are likely to result in spiralling costs of the sort that were experienced in America as people learned to play the system and to offer excessive bonuses for dishonesty.

Above all—I suggest that hon. Members think about this point—the Bill will ensure that about 40 per cent. of all families will be on means-tested benefits. Some 30 per cent. of those will be of working age; and, on the Government's figures, about 80 per cent. will have children. Other tax credits will go to 56 per cent. of those in retirement. Stepping back, one can see that that means that well over half of the recipients will be paying for their benefits through direct and indirect tax. Is there any logic in a system that includes the costs, difficulties and administrative issues that are involved in taking money from people and then giving it back to them? That cannot be an ideal way of running our affairs. Indeed, the Prime Minister himself has warned of the major problems in having too much means-testing.

There are good objectives in the Bill and several aspects that we support, which I highlighted on Second Reading, but the House has not had the opportunity to consider many serious problems and a lot of the issues that I have sought to raise in this speech. I end where I started: it would surely be much more healthy for the Government who seek to introduce such legislation to bring to the House much more detailed proposals, rather than a framework in respect of which we do not know how many of the problems will be solved, when we do not know how much it will cost or whether 1.3 million people will be worse off as a result of its introduction. That is not the way to legislate, and I do not think that the Paymaster General made any convincing case for addressing this important territory with such a framework Bill, so we will abstain from voting. On the many areas that it does not address, there is scope to deal with hon. Members' queries through parliamentary questions, but it is to be hoped that many of the outstanding issues can be addressed in the other place.

Jon Cruddas (Labour, Dagenham)

Two elements dominated Government thinking on the social security/labour market interface in the last Parliament: first, helping families in poverty, especially those with children, by means of the children's tax credit; and secondly, pricing people into work through measures to alter the trade-off between work and non-work, through the working families tax credit.

The Bill proposes two new targeted tax credits: the child tax credit to tackle child poverty and target support for parents, and the working tax credit to tackle in-work poverty and remove barriers to work. These two new initiatives develop the strategy of confronting poverty and restructuring the supply of labour that was started in 1997. The strategy on the labour market has been to alter the derived utility of work for those not in employment. It makes work pay by altering the trade-off between work and non-work by building a minimum floor for wages—through the minimum wage—and by constructing a take-home premium above market wage rates for poorer labour market participants through the working families tax credit.

These measures work alongside the new deal and benefit-policing arrangements in terms of people's availability for work. If we add to that the record rises in child benefit and the 10p starting rate for income tax, the reform package begins to take shape. The Child Poverty Action Group has identified a substantial reduction in poverty—whatever measure we care to use. Separately, Piachet and Sutherland estimate that 1 million children have been lifted out of poverty since 1997.

Any labour market initiative such as the working tax credit should be judged against the nature of the labour market that it seeks to affect. New analysis of the labour force survey data by Professor Peter Nolan, the director of the future of work programme at the London school of economics, is helpful here. Let us consider the three general classifications in the labour force survey: white collar; traditional services; and manual, manufacturing and construction. Between 1992 and 2000, white-collar professionals accounted for 1.5 million of the 2.3 million increase in employment numbers. Yet traditional services—covering clerical and secretarial, personal and protective, sales, postal and cleaning services—together with manual, manufacturing and construction workers still account for nearly two out of three jobs.

Closer analysis suggests that the fastest-growing occupations have been: first, the four long-established services of sales assistants, data-input clerks, storekeepers and receptionists; secondly, state-dominated education and health service workers; and thirdly, the caring occupations such as those of care assistants, welfare and community workers, and nursery nurses. The fastest-growing occupation in the l990s has been hairdressing. The fastest-growing manual occupation since 1992 was housekeeping, with a rise of 368 per cent. In short, the key areas of growth in the demand for labour through the 1990s have been in traditional, low-paid, unskilled and routine employment. Much of that is carried out by women and much is part-time.

It is precisely because of these developments that the policy proposals before us are so important. The child tax credit will be the first single system of income-related support for families with children, irrespective of whether they are in or out of work. The working tax credit rationalises and extends the current provision of in-work support and, in so doing, increases the utility of work for more people.

The Bill establishes the machinery, prior to the Budget, for an extension of our attack on poverty in terms of the realities of labour market structure. There appears to be a problem, however, in terms of the operation of the working tax credit. This exists in areas with exceptional market conditions and strong disincentives to work. They are areas characterised by relatively high-wage economies, but with significant proportions of deprived families and, often, single parents. There are shortages of child care and early-years provision, together with exceptionally strong disincentives in the housing market in terms of labour market participation.

I am talking about London. Research by the Greater London Authority suggests that London has the lowest take-up rate of the working families tax credit in the UK—in London the rate is one in 10 families compared to one in six nationally, and one in five lone parents compared to one in three nationally. Part of this is accounted for by regional earnings differentials, yet even with a 70 per cent. write-off of child care costs, the higher-cost child care is a disincentive to participation, as are higher housing costs. Research suggests that people paying higher rents lose out. The gain through the tax credit is lost through housing benefit withdrawal.

In short, because of a combination of forces, the labour market participation strategy underscoring the policy is less effective in London, as there are greater financial disincentives to participation. Let us take my constituency as an example. It is one of the capital's more deprived constituencies, with a high number of one-parent families and housing benefit recipients. According to House of Commons statistics supplied to my hon. Friend the Member for Regent's Park and Kensington, North (Ms Buck), Dagenham remains 533rd out of 641 constituencies in the ranking relating to the proportion of families receiving the working families tax credit.

That implies serious imbalances between poor families' unemployment entitlement and take-up incentives. The issue should be investigated and there may be a need to introduce regional premiums to the regime to ensure that the policy works with maximum effect, consistently across the country.

Overall, I welcome the Bill, as it is specifically designed to confront the labour market that we have, but I am concerned that we are not yet maximising the strategy's potential in deprived parts of the capital such as my constituency.

Steve Webb (Liberal Democrat, Northavon)

It is interesting to follow such a well-informed and thoughtful contribution from the hon. Member for Dagenham (Jon Cruddas). It is a shame, in many ways, that we did not have the benefit of those and other insights from him in Committee. That is perhaps a shortcoming of our proceedings.

On Second Reading, we gave a broad welcome to the Bill's aim to streamline and focus extra resources on families with children. We have not changed our position. As the Minister said, the Committee debates were instructive, and hon. Members from both sides contributed thoughtfully and helpfully. The Committee process highlighted the difficulty of debating such Bills in the absence even of draft regulations. I hope that the import of what the Minister said a few moments ago is that their lordships will have sight of the regulations early in their deliberations. I am reassured by her nodding in response. That will make a big difference.

It is important to put on record one or two reservations that survived the Committee's scrutiny. As the Minister is aware, my principal reservation is about what the working tax credit is supposed to achieve, as distinct from other support for low-income childless people. I tabled two written questions to pick up on the Government's two justifications for the strategy. Both were for answer today and they were submitted in good time, but neither has been answered.

One question relates to the Government's statement that poverty also affects childless people—they cite 1 million childless people in poverty. I simply asked how many of those people would be entitled to the working tax credit. In other words, how many are over 25 and working 30 hours a week? Very few, I suspect, but answer came there none. The argument that we need the working tax credit to relieve poverty is open to question.

I asked about the incentive argument—an unemployment trap exists because a childless person who takes low-paid work does not get much reward. Clearly, there is not much reward for a renter, but there is a much greater incentive for a person whose mortgage is not paid for by work and whose help is not taken away when he gets a job. The anti-poverty and unemployment trap arguments for the strategy are weak and it is regrettable that we did not discuss the meat of that in Committee.

The practicalities for our constituents of claiming these tax credits still worry me considerably. If authorities are to decide whether they will be assessed on this year's income or last year's, that requires an estimate of this year's income. Therefore, if 1 million-plus people must estimate income and if some get that or their hours wrong, there could be serious over-payment problems. Without being patronising, some members of that client group are simply not used to such calculations, so we may be storing up troubles ahead.

The strategy is a difficult mix of the tax and benefits systems. In some cases, the benefit route has been chosen, as in the example of joint assessment, while in others the tax route has been taken. In particular, the appeals process, which we raised briefly, still gives me real cause for concern. I am worried that, instead of appeals going through the effective tax credit appeal procedure, a whole new tax appeal process will be created.

We welcome the additional support for families with children and the attempt at streamlining, so we support the Bill.

David Cairns (Labour, Greenock and Inverclyde)

I am pleased to speak in this debate. Unfortunately, I could not take part in the discussions on Second Reading or in Committee. However, I have followed the debate in the Official Report, and it has been fascinating, instructive and, of necessity, very technical. It is important to step back from the technicality and consider the broader picture of the range of Government strategies aimed at alleviating poverty and making work pay for those who are in work but, for whatever reason, inadequately remunerated for it.

The Government's commitment to poverty alleviation is strengthened by the Bill, which builds on the success of the working families tax credit, which in turn currently benefits 1.3 million families, including 1,893 families in my constituency. That is a large number in what is, even before the boundary changes, a relatively small constituency. Across Scotland, 119,000 families are benefiting in a very direct way from the measures.

Incidentally, it is a disappointment to me that no member of the Scottish National party, which is alleged to stand for Scotland, has sought to take part in or even be present at most of what is an extremely important debate for Scotland. Now I shall move on, before I am called to order.

We have heard about the minimum wage, the children's tax credit and the increases in child benefit, but no one has mentioned another important element in the strategy—the Jobcentre Plus initiative. I thought that my hon. Friend the Member for Dagenham (Jon Cruddas) might mention it, but perhaps time constraints got in the way. In my district authority alone, £3 million has been spent on modernising jobcentres, giving them excellent computer connections and making them better and friendlier places that can help people to move from welfare into work. The programme has been tremendously important throughout the country.

It was said on Second Reading and in Committee that the fact that we are introducing this measure to build on the working families tax credit is an admission that we got it wrong. That is baffling. The entire history of the welfare state—certainly the modern welfare state—is that measures are introduced and the world moves on, as my hon. Friend the Member for Wimbledon (Roger Casale) so tellingly said, so that we have continually to refine and improve on our systems. I hope that Ministers will not rest on their laurels and that they are already examining what further improvements can be made five or six years down the line. I am sure that they are.

It was said of Beveridge, perhaps wrongly, that he believed that unemployment, or idleness, was the root cause of poverty. Perhaps there was too much emphasis in the past on simply getting people into work and off benefits, with the assumption that they would automatically stop being poor. We know from constituency experience that that is not the case, and we need tailored programmes for people who are in work but remain poor.

I urge Ministers not to retreat one inch from the principle of delivering our programmes through the wage packet and the good offices of the Inland Revenue. We have had a good debate about the comparative stigma attached to the benefit book or the Inland Revenue approach, and I take on board the sincere points that have been made, but people in receipt of the working families tax credit who come to my surgery are very grateful for what they get and they want to explain all their circumstances to ensure that they can claim everything to which they are entitled. Stigma is not quite the issue that Opposition Members would have us believe.

There are undoubted benefits in incentivising work and allowing people to look at their pay slip at the end of the month and say, "I earned that by my own endeavours, by being disciplined and getting out of bed in the morning." That is a positive gain, and I hope that the blandishments to revert to a benefit book approach will be rejected.

We need only consider the difference in take-up between the working families tax credit and the systems that it replaced—family credit and so on—let alone the opportunities for fraud that the benefit book system introduced. If some of the amendments that we discussed earlier had been accepted, employers would have been printing their own order books and distributing them to their employees, and there would have been a great risk of fraud.

We have heard some criticism about a lack of flexibility with regard to changing circumstances; the hon. Member for Northavon (Mr. Webb) made some good points on that subject. It is true that the situation must be monitored closely, and the system must react quickly to people's changing circumstances—but that applies to the current system, including the benefits system, too.

A classic example, of which all hon. Members will be aware, is the position of school cleaners, who work fewer hours in the summer but get paid the same because their wages are aggregated and averaged over the year. I had a constituency case recently involving a school cleaner whose benefit entitlement was changed over the few months of the summer when she was working fewer hours. I am thankful to say that we got a result fairly quickly, so there is flexibility in the current system. It is not perfect, however; no system would be, and the hon. Gentleman was right to raise those issues. It is a flawed assumption that the current system is flexible enough. It must be improved.

Some hon. Members have talked about stigma, but one positive change that has not been mentioned on Third Reading so far is the fact that the disabled person's tax credit will now be focused on the working tax credit. There will be a focus on the work that disabled people do, by their own endeavour and efforts, and they will get the rewards of being in work. That is a positive step, and has been welcomed by those who represent disabled people. They are not being patronised or getting a handout for being disabled; the focus is on the work that they do, not who they are.

Much has been said about the effects on businesses. My hon. Friend the Paymaster General was too modest, in that she did not explain everything that the Government have done for business. That gives me the opportunity to mention that under the Labour Government we have the lowest inflation in Europe, the lowest interest rates in 30 years, favourable tax regimes for capital investment, the lowest corporation tax in many years for larger businesses—it is down from 33 to 30 per cent.—favourable regimes for research and development, and 1 million more people in work today than when we came to power in 1997. We must balance what some may call the burdens on business with the tremendous benefit to business of having a Labour Government who are friendly to business and understand and reflect its needs.

The Bill will also affect the work of the Inland Revenue, where there is a quiet revolution under way. If hon. Members have not been to their regional office lately to talk to the people who work there, I recommend that they go. North of the border, we were fortunate to be invited by the Minister of State, Scotland Office to meet the Scottish chief executive of the Inland Revenue, and we were told that as a direct result of the Bill, the work of calculating, assessing and collecting taxes will be a minority part of the Inland Revenue's business by 2003. That is a big change from the position a few years ago.

With its work on integrated tax credits, making sure that businesses comply with the minimum wage, administering student loans and so on, the Inland Revenue is undergoing a quiet revolution, and it is to be commended. When I have spoken to the people there I have been tremendously impressed by their vigour and their zeal for that approach to their work. They realise that there is a change in attitude towards them, because they are no longer seen as the bad guys of the piece but as people doing something positive. The Inland Revenue now has a much more business-oriented approach. It is proactive, going out to businesses to explain the integrated tax credits and helping them comply with the new arrangements.

On Second Reading the Paymaster General said:

"By the mid-1990s, the United Kingdom had the highest rate of relative poverty in the European Union and the highest proportion of children living in workless households."—[Official Report, 10 December 2001; Vol. 376, c. 598.]

By the middle of this decade we will be able to say that 1 million children have been lifted out of poverty and 1 million more people are in work, and they will be receiving more help through the tax credits. I am extremely proud of that, and I commend the Bill to the House.

Question put and agreed to.

Bill accordingly read the Third time, and passed.