---

Tax Credits

With permission, Mr. Speaker, I want to make a statement on the reforms that we have made, and are making, in the operation of the tax credits system, and to answer point by point the reports from the parliamentary ombudsman and the Citizen’s Advice Bureau that were published today, and the adjudicator’s report that was published earlier in the week. Those reports deal mainly with the operation of the system in its first year of introduction. On 26 May, I announced to this House a series of measures to build upon the reforms that we have already made to the tax credits system. Those include measures to streamline procedures for recipients to inform Her Majesty’s Revenue and Customs of the changes in their income during the course of the year, and to simplify the information provided to families in award notices. I also announced a review so that we could make changes in the procedures for dealing with disputed awards. The Department is improving the helpline so that families receiving tax credits can have all their queries dealt with in one go and all their changes processed with one call to the helpline. Where there is a dispute, I have asked HMRC to consider suspending recovery of excess payments until the dispute is resolved. Where there is hardship, I have asked it to ensure that the additional payments in the system are made. In other words, I have already taken measures to act on each of the major administrative issues raised by the parliamentary ombudsman and the CAB. Two weeks ago, during a debate in the House on these issues, I offered—and have subsequently agreed—to meet a group of MPs to discuss these issues in detail. Today, I will be writing to the ombudsman and the CAB about the changes that we have already made. I will be offering to meet them to discuss the detail of the reforms now being introduced. I come to the issues of policy. As the CAB report states, tax credits are the best way to deal with society’s responsibility to help with the costs of bringing up children and tackling child poverty. The background both to the introduction of tax credits and to the reports out today is that more people than ever before are receiving tax credits to help with the costs of bringing up their children. In total, more than 6 million families—about 20 million people, including 10 million children—benefit from tax credits. Four in 10 families pay no net tax as a result of tax credits, and the take-up in the first year exceeds 80 per cent.—so in each of our constituencies, nearly 10,000 families, on average, are benefiting. As a result of an economy where people move between jobs more often and their circumstances change more quickly, the challenge is to adjust child tax credits to changing income patterns as quickly as possible. In fact, 3 million people now change jobs every year, and their income changes are often substantial. Some 700,000 children are born every year and receive different rates of child tax credit, according to their families’ circumstances. The fast-changing nature of the economy is such that around 300,000 people who receive tax credits experience very large changes in their family income—£10,000, or more, during a year. In introducing the child tax credit, the big change that we made was to move from a fixed payment based on past income, not on actual income, which was recognised as unresponsive to families’ changing circumstances and therefore unfair. When the new system was introduced, we decided that, during the year, we would be prepared to adjust tax credits to changes in family circumstances. So the issue for the Government and, indeed, for all parties that want to comment on these issues in the House and beyond is whether we return to a fixed system, which is clearly unfair and does not adjust for changes in family income during the year; whether we operate a system whereby we compensate people when their income falls, but do not adjust credits downwards when their income rises, even when it rises substantially by £10,000 a year or more; or whether we retain the principle of getting the balance right between taxpayers and individual family circumstances. I have always been happy to listen to and to take note of the views of all parties on these issues, but I have to tell the House that, when we consulted widely before the implementation of the tax credit, the overwhelming consensus was that a balance should be struck between the needs of the taxpayer and those of the families who claim and that the system should adjust to any drop in income and therefore compensate the claimant in full and only respond to increases in family income during the year, when the family income increases by £2,500 or more a year. I also have to tell the House that, when these issues were voted on in the House, there was a clear majority in favour of these proposals. Of course, I will continue to keep the House fully updated on recent developments in the tax credit system, as I have endeavoured to do in debates and statements in the past. The ombudsman makes reference in her report to a small part of one sentence of one written answer and suggests that it offers an incomplete picture. I have repeatedly answered questions on this issue. Indeed, in a debate on 26 January, I told the House that there had been problems going back to the introduction of the computer system. More recently, I issued a statement on 26 May, setting out the situation, the action that has been taken and what more we will do to improve the system. There was an Adjournment debate on 7 June at which I responded to many of the issues raised by hon. Members and, again, outlined the changes. And I will, of course, keep the House updated on the reforms that we are putting in place to improve the system and report back on my discussions with voluntary and community sector organisations.