Clause 13 - Income tax exemption for universal credit

Finance Bill – in a Public Bill Committee am 3:15 pm ar 16 Mai 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Question proposed, That the clause stand part of the Bill.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

This short, technical clause would add universal credit, and its equivalent in Northern Ireland, to table B in section 677 of the Income Tax (Earnings and Pensions) Act 2003, which sets out the social security benefits that are wholly exempt from income tax.

Universal credit supersedes six benefits and tax credits, of which two are taxable to some degree. The Government have said that it is not possible to disaggregate the components of an award to universal credit, so the tax exemptions will now apply to an individual’s total benefit entitlement. They state in the policy objective of their impact note to the clause that,

“Making Universal Credit tax exempt is consistent with the Government's wider aim of simplification.”

Many of those who have followed closely some of the changes and difficulties around trying to make the benefit system simpler will wonder whether we have fully reached that particular objective with universal credit. However, that remains to be seen in terms of the implementation. It is good to see that the Government at least want to make something simpler, given the comments that we heard earlier about other aspects of taxation.

We want to see that work always pays. We have had a lot of debate and discussion in the House and various places around how best to achieve that. The Opposition and the Government have different approaches to improving incentives to work and simplifying the benefits system. Of real concern have been the unintended consequences. There has been disappointment in how things have been brought forward. In some instances, we have had nothing short of chaos.

A big concern is the suggestion that 1.8 million main earners could be worse off under the universal credit if they take on extra work, and 300,000 second earners could face the same fate. That scenario does not seem to be encouraging people to take on extra hours and to do the right thing in looking after themselves and their families. We have also become aware of the complexity of the reporting requirements. Rather than reducing red tape, they are set to increase the red tape and to hit small businesses. We have seen a pilot scheme that is descending into chaos. It has been scaled back from its original plans, and it has an IT system that seems to fail to match 25% of payments.

There are still concerns around key elements relating to the universal credit—for example, how passported benefits, including free school meals and prescriptions, are going to be treated under universal credit. If the Minister is able to give us any further information, I am sure people would be pleased to hear it.

Photo of Ian Mearns Ian Mearns Llafur, Gateshead

That is a matter of great concern. It is also a matter of great concern to head teachers in schools, because the pupil premium is driven by the right to free school meals. If there is any significant change in such entitlement, that could have a significant impact on school budgets, because it is the free school meal entitlement that drives eligibility for the pupil premium.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

My hon. Friend makes an extremely important point. I know that he constantly and consistently stands up for his constituents and expresses concerns about those who are on the lowest incomes, and he has again made a very valid point. Once again we could see the potential unintended consequences of the Government trying to operate in a particular way. If there is not clarity on issues such as the linkage between universal credit and free school meals, we have heard that there is another knock-on effect, and I suspect that there will be others over and above that.

The implementation of universal credit is in chaos—it is already late—and I understand it is about £100 million over budget. [Interruption.] I am sure that an hon. Member—perhaps the Government Whip—will ensure that if I raise a question at this particular point, it will be relayed and I will receive a response in due course.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

I am always happy to give way. This is an important point. The Government have also stated in the policy objective that the clause

“fits with the Government’s stated intention to remove those on the lowest incomes from tax.”

We would agree with that principle. The reality on the ground is that, despite the Government’s warm words on this and on the benefits of other measures to help those on the lowest incomes, the measures they are taking to reform the welfare system far from help those on the lowest incomes.

I will refer again, as I have done on previous occasions, to the independent research of the Institute for Fiscal Studies. Taking into account all the tax and benefit changes introduced since 2010, including the rise in personal allowance that the coalition Government seem so proud of, families are estimated to be an average of £891 worse off in the new financial year. If that is added to the Government’s recent tax cut for millionaires, their claim to be helping those on the lowest incomes seems to ring very hollow. [Interruption.] Government Members may sigh and moan, but the reality is—as my hon. Friend said—that many people on the lowest incomes face a really uncertain time at the moment. We must ensure that whatever we do we try to tackle the problems of the families with children who are finding it hard on a day by day and week by week basis to balance the household budgets.

We should not underestimate the impact that the uncertainty of universal credit will have on the families on the lowest incomes who will not know whether their children will continue to get free school meals. Therefore, provisions such as this have a great impact on those on the lowest incomes. Given the problems that the Government have already run into with the implementation of universal credit, they need to assure those affected by the clause that the resources and processes to deal with it are in place.

Photo of Paul Uppal Paul Uppal Ceidwadwyr, Wolverhampton South West 3:30, 16 Mai 2013

I have always been a big fan, through the work I do in BIS, of something called e-commerce, which is about making the system of payments and financial transactions much simpler. It is something that people on universal credit may benefit from. Will the Minister respond on this point? I do not want to blind-side him completely. Some of the work we have done on this issue is to look at some of the changes from the European directives on e-commerce, which have the unintended consequence of making the whole process a lot easier. What is happening with interchange payments—I do not want to get too techie about this; the Minister can always write to me about it if he wants to—is there are unintended consequences for people who receive payment through e-payments and through small businesses. That is slightly detached from the hon. Lady’s point, but it is a concern that is arising in the future.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

I am not going to usurp the Minister’s role by trying to answer that and give the hon. Gentleman assurances. However, he makes some interesting points. I know from my local small businesses—indeed, some of my family are involved in the small business sector—that everyone wants to see, as much as possible, a reduction in red tape and a streamlining of systems. However, for many small businesses, the idea of moving everything on to an online system or working on an e-commerce basis can be frightening if they do not have the skills, resources and back-up to do that.

The same goes for many people who rely on the benefit system to support them day to day and week to week. For many people—again, I know this from my constituency work—the idea of having to apply for everything online is off-putting. An elderly gentleman came to me to express his concerns about that. He felt that if he was required to do certain things on the computer system, he would just not bother, as he put it. We have to take those concerns to heart.

Will the Minister tell the Committee, in the context of the delivery of universal credit and the need to ensure that the taxation regime and universal credit fit together properly, what assessment he has made of the impact of the provisions in the clause on resources in HMRC, particularly given the concerns about the cuts in that Department? Jobs are being lost in that Department, and HMRC offices in some areas may close. The Government have said that the measure will be monitored through information collected from tax receipts and data from the Department for Work and Pensions as individuals are moved from currently taxable benefits to universal credit. Will the Minister confirm whether the results of that monitoring will be published? If so, when and how often will that be done? How will we be able to see whether the process is working as intended or whether further unintended consequences are causing difficulties for people?

Photo of Sajid Javid Sajid Javid The Economic Secretary to the Treasury

Clause 13 makes changes to ensure that no one will pay tax on an award of universal credit, by making it exempt from tax. Universal credit was part of a package of measures in the Welfare Reform Act 2012. It replaces six benefits and tax credits, of which two—jobseeker’s allowance, and income support when paid during a trade dispute—were previously taxable. Universal credit is a single integrated award. It is not possible to isolate elements of an award for different tax treatments, so an award of universal credit must be either taxable or tax exempt. Making universal credit tax exempt is consistent with our wider aim of simplification, and it fits with our stated intention to remove those on the lowest incomes from tax.

Most people will see no change, either because the majority of benefits that will be replaced by universal credit are not taxable, or because an individual has a low income and does not pay tax. The changes made by clause 13 will, therefore, affect only those who receive a taxable benefit and pay tax. The change will apply when they move off a currently taxable benefit on to non-taxable universal credit.

The universal credit pathfinder was introduced in April this year and it will be rolled out gradually. We estimate that approximately 300,000 individuals pay tax on benefits which will be replaced by universal credit, and in many cases the amount of tax is very small. We are currently unable to provide further details of those affected by region or constituency, because that is related to the schedule planned by the Department for Work and Pensions for the roll-out of universal credit. Universal credit has been introduced in Ashton-under-Lyne, and it will soon be extended to Wigan, Warrington and Oldham.

I turn to a few of the issues raised by the hon. Member for Kilmarnock and Loudoun. She stated that universal credit was over budget, but I can tell her that universal  credit remains on track and on budget, and the pathfinder is running smoothly, as the Government anticipated. She also talked about the impact on small employers of accommodating universal credit, and she mentioned the new real-time system that employers will use. HMRC’s website provides detailed guidance for all employers, and it offers a helpline that provides advice and help to all employers. The use and take-up of the system has been smooth, and the system will help HMRC beyond the requirements of universal credit.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

On that point, I recently spoke to a small business person in my constituency who said that she was struggling with the real-time information system. Has the Minister been made aware of the number of people who have contacted the helpline since its introduction, and of any particular problems that have arisen? On what issues are people seeking assistance?

Photo of Sajid Javid Sajid Javid The Economic Secretary to the Treasury

That has been brought to my attention by other MPs and certain small and medium-sized enterprises. During the change to a new system of reporting tax there are bound to be issues, but that does not take away from the fact that, overall, the change is happening on time and according to plan. In some cases, of course, companies may have questions. That is why HMRC rightly has a helpline and has issued guidance, which I am sure is making the process a lot smoother.

The interaction of passported benefits such as free school meals with universal credit has also been mentioned. The Government are aware of that issue, and the Secretary of State for Work and Pensions has said that it is being worked through with stakeholders, as he has committed to do. There will be further information on that in due course.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

I appreciate that the Minister is not responsible for what is being worked on and for what will be announced in due course, but I and other hon. Members have asked a number of questions in the House on that. Does he have any indication as to when “in due course” is likely to be? As long as that uncertainty continues, people will be genuinely worried about what is going to happen to their household incomes.

Photo of Sajid Javid Sajid Javid The Economic Secretary to the Treasury

I assure the hon. Lady that that important issue is being taken seriously, but I cannot enlighten her on the timing. Again, she should be reassured that the DWP is taking the issue very seriously, is looking at it and will get back to the House.

The hon. Lady raised a number of other issues that more generally address welfare reform, rather than the technical issue in clause 13. I do not think it would be appropriate to go into detail on those general welfare reform issues, but I make the general point that, for 13 years, this country’s welfare budget was out of control—it was 60% in real terms—and no thought was given to how it affected people. Welfare dependency was created, and our welfare reforms are designed to bring the budget under control, to make it affordable and sustainable and to ensure that people who find themselves out of work and on out-of-work benefits have the right system of incentives so that work pays.

Lastly, my hon. Friend the Member for Wolverhampton South West mentioned European regulations on e-commerce. He asked about the impact of the current  proposals from Brussels in relation both to the clause and, perhaps more generally, to welfare payments and beyond. He has asked me to look into that, and I will do so. He raised an important point that is worthy of further consideration. The Chancellor has already announced that the Government are considering the regulation of payment systems, and there will shortly be a consultation on that, which is perhaps something to which my hon. Friend and his constituents may want to contribute. I will get back to him on his specific point.

In conclusion, the clause makes universal credit tax exempt, so most people will see no change. Additionally, making universal credit exempt from income tax will be a minor, but welcome, simplification for the small number of individuals who currently pay tax on the benefits that will be replaced by universal credit.

Question put and agreed to.

Clause 13 accordingly ordered to stand part of the Bill.