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Where Taxpayers and Advisers Meet
House of Lords refuses to pass tax credits cuts
28/10/2015, by Low Incomes Tax Reform Group, Tax Articles - General
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The Lords have refused to pass the Government’s legislation seeking to cut tax credits significantly from April 2016, voting in favour of two amendments before they would approve the changes. 
 

Background

After a lengthy debate, which included as much discussion about the role of the House of Lords as the actual impact of the tax credit cuts, the House of Lords voted in favour of two amendments requiring the Government to take certain steps before they would approve the changes. LITRG now awaits further detail from the Government about changes to tax credits. This article looks at what this development means for tax credit claimants.
 

What was announced in the Summer Budget about cuts to tax credits

In the Summer Budget, the Government announced significant cuts to tax credits from April 2016. In September, LITRG published a table which showed how the cuts would affect claimants. 
 
More recently, LITRG published a briefing which was sent to MPs and Peers who were discussing the legislation that would bring in the new rules from April 2016. The briefing set out how tax credit claimants would be affected by the changes to tax credits as well as some other changes such as the increased tax personal allowance and the new national living wage premium.
 

What was discussed in the House of Lords

The changes to tax credits are set out in a piece of secondary legislation called a statutory instrument. This particular statutory instrument was an affirmative instrument which meant that both Houses of Parliament – the House of Commons and the House of Lords – must expressly approve them.
 
Four Peers proposed amendments to the Government’s motion in the House of Lords debate.
 
  • The first amendment was to decline to approve the regulations. 
  • The second and third amendments involved the House of Lords declining to consider the regulations until the Government had taken certain steps. 
  • The final amendment would have allowed the regulations to be approved but with the House of Lords expressing concerns and asking the Government to look again at the impact of the changes. 
However, the discussion in the House of Lords was much wider than just the tax credit cuts. Much of the discussion was about the role of the House of Lords – whether they could or should vote against a government measure that had already been passed by the elected House of Commons and also whether it was against Parliamentary convention for them to vote on this at all as it was arguably a financial matter.
 

What the House of Lords decided

The two amendments requiring the Government to take extra steps were passed. This means that the regulations were in effect defeated. 
 
  • The first one passed by a majority of 30 and said that the House of Lords declined to consider the regulations until the Government have produced a report detailing their response to an Institute of Fiscal Studies analysis and considered possible mitigating action. 
  • The second one passed by a smaller majority of 17 but contained more significant requirements of the Government. In addition to requiring a report from the Government and consideration of possible mitigating action, it stated that the House of Lords declined to consider the regulations until the Government consulted on a scheme for full transitional protection for a minimum of three years for all existing tax credit claimants.

 

It is not clear what the Government’s response will be after the Lords defeat. The Chancellor has said that he will listen to the Lords' concerns, but he believes that he can still achieve the necessary financial savings through reform of tax credits whilst helping with the transition to any changes. He has said that he will set out his plans in the Autumn Statement, which is expected on November 25. 

For now, it is uncertain whether the cuts set for April 2016 will go ahead in the proposed form. The position will only become clear on November 25. 
 
Whatever plans are developed, it is important that priority is given to ensuring the changes are properly communicated to tax credit claimants and that they are given sufficient warning of any changes to tax credit payments. 
 
LITRG will be providing updates via the LITRG website and on Twitter as further plans are announced.
 

Useful links

About The Author

The Low Incomes Tax Reform Group (LITRG) is an initiative of the Chartered Institute of Taxation to give a voice to those who cannot afford to pay for tax advice. LITRG comprises tax specialists from professional practice and the voluntary sector, from publishing and from HM Revenue & Customs, together with people from a welfare benefits and social policy background. Visit www.litrg.org.uk for further information.
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