Tax credit breakdown

JOHN T NEWTH FCA, FTII, FIIT, ATT comments on the latest developments regarding tax credits.

TAX CREDITS HAVE certainly been in the news recently. Media coverage of reports by the Citizens Advice Bureau and the Parliamentary Ombudsman have extended not only to the professional press, but also to the national popular press and television.

The dramatic facts that have emerged from the report by Anne Abraham, the Parliamentary Ombudsman, show that for the year 2003-2004 tax credits were overpaid to 1,879,000 claimants to a tune of £1.91 billion. Comparative figures for the year 2004-2005 are presumably not yet available.

Of the £1.9 billion overpaid it seems that £600 million was due to computer or clerical error by HMRC, £900 million was due to be recovered and £400 million is 'suspended'.

The major difficulty, which is highlighted in the Ombudsman's report, is that overpayments of tax credits have been made to those members of the population who are least likely, or unable, to repay them to HMRC. In many instances this follows a long catalogue of administrative incompetence by the department.

The current crisis relates to a statement in Code of Practice COP26 'What happens if we have paid you too much Tax Credit?', which includes this statement:

'We will not ask you to pay back an overpayment if it arose because we made a mistake and you could reasonably have thought your award was right. This would include cases where we instructed your employer to pay you the wrong amount of working tax credit, provided you could reasonably think you were being paid the right amount.'

COP26 also includes provisions to pay additional tax credit in cases where family hardship would occur when HMRC attempted to recover overpayments made.

The Ombudsman's comments

This whole issue has been highlighted by the publication of a 77-page report by Anne Abraham, the Parliamentary Ombudsman, entitled 'Tax Credits: Putting Things Right'. I have read the whole of this report and have to say that I have never seen a more damning condemnation of a Government department and its workings. The Ombudsman has gone into matters in great detail and includes various anecdotal illustrations of specific cases that have been brought to her attention. To this extent, the report makes somewhat dramatic and disturbing reading.

It is impossible, in an article of this length, to cover all of the comments made by the Ombudsman, but the following are an example:

• The system appears unable to provide an immediate response and appropriate service, particularly when things go wrong.
• Revenue assurances are over-optimistic.
• The system is wholly IT based and does not take into account the needs of the claimants.
• There is poor information on notices.
• There is poor accountability, with claimants reporting some difficulty in contacting the Revenue to get queries answered or problems sorted out; telephone lines that are engaged and letters not responded to.
• There are delays in dealing with appeals and complaints.
• A much improved level of claimant service is required in the form of better communications, easier and quicker claimant access to Revenue staff who can address problems and queries, and prompt and efficient complaint handling.
• The greatest difficulties are suffered by the core group that the tax credit system is aimed at helping, namely families on low incomes.
• The tax credit system has been designed to function without proper records; in other words there are no hard copy files for each claimant.
• Problems with tax credits have led to people being threatened with eviction, having to borrow money from family and friends to support their children, using up their life savings or running up credit card debts in order to pay for children or childcare costs, buy food and get to work.

It should be noted that in 630,000 instances claimants were overpaid by £1,000 or more and in 40,000 instances by more than £5,000.

Recommendations

The Parliamentary Ombudsman summarised 12 positive recommendations in her report as follows.

Steps should be taken to ensure that tax credits staff who are in direct contact with claimants recognise the situations where interim payments of tax credit may be appropriate, so that payments can be put in place promptly to prevent financial hardship.

HMRC, having taken steps to ensure that future payments of tax credits take proper account of current circumstances, should not seek to recover either an excess payment made in the current year or an overpayment from the previous year until they have come to a decision, based on all the relevant facts, as to whether or not the excess amount paid should be recovered in accordance with Code of Practice 26. It is understood that the department had previously taken steps to recover overpayments without reference to COP26, unless the claimant had appealed on those grounds.

As a minimum, on the 'payments page', of an award notice, claimants should be alerted to the fact that recovery of an overpayment (in year or at the year-end) of tax credits can be challenged, if the overpayment was due to official error and in circumstances where a claimant reasonably thought that he was being paid the correct amount. That note should also draw claimants' attention to COP26 and the fact that, if they wanted to dispute an overpayment, they need to complete form TC 846.

Where it is decided that an excess payment in-year is recoverable in accordance with COP26, recovery should be at the same rates as those for previous year overpayments.

Steps should be taken to ensure that all HMRC staff who have contact with tax credit claimants are alert to the circumstances when additional tax credits (ATCs) might be appropriate, so that they can invite an immediate claim.

Where in-year recovery of excess tax credits is justified, HMRC should take steps to pay ATCs automatically to families in receipt of income support and income based jobseekers allowance.

Details of the availability of ATCs should be printed prominently on the 'payments' page of an award notice (where details of in-year recovery also appear); and the issue of financial hardship (and how HMRC can help) be given greater prominence in the guidance notes which accompany an award notice.

People who have been paid too much in tax credits, whether identified during the year or at year-end, should be sent a letter outlining:

• the total amount they owe;
• the reasons why the overpayment or excess payment in-year occurred and the date or dates when it happened;
• the repayment arrangements which will apply in their case.

The letter should enclose a copy of COP26, and draw particular attention to the circumstances when recovery can be waived and the availability of ATCs in case of hardship.

Whenever official mistake or error is identified which has led to too much in tax credits being paid, the claimant should be immediately notified of exactly what has happened and informed of the circumstances when recovery can be waived.

Consideration should be given to writing off all excess and overpayments caused by official error that occurred during 2003-2004 and 2004-2005.

Consideration should be given to the adoption of a statutory test for recovery of excess payments and overpayments of tax credits, consistent with the test that is currently applied to social security benefits, with the right of appeal to an independent tribunal.

HMRC should reconsider the way they organise delivery of tax credits in order to deliver a better, more complete service to the people they now serve. A different model is needed in complex cases and where something has gone wrong. More sustained and informed communication with claimants about their case is essential, as is a 'whole case' approach to investigation to ensure a tax credits award is correct.

Comments by the Adjudicator

It is understood that the Adjudicator, in her last report, upheld 86% of complaints about tax credits (compared with 78% by the Ombudsman). Dame Barbara Mills said: 'I was particularly disappointed that tax credit claimants continue to express difficulties in accessing the complaints system'.

The Government's response

Not surprisingly, the whole furore has reached the House of Commons, and the debate on the subject is recorded in Hansard , volume 435 no 21 at columns 801 to 814. Since that date, it is understood that the Prime Minister has made a further apology in Parliament.

The Paymaster General, Dawn Primarolo, confirmed that where there is a dispute she has asked HMRC to consider suspending recovery of excess payments until the dispute is resolved.

For the Opposition, George Osborne made five points:

• Does the Paymaster General agree that the HMRC have yet to adopt a model for dealing with low income families that takes full account both of the complexities of tax credits and of the vulnerabilities of their lives?
• Is it accepted that families should be made aware of what is happening to their credits, told how they can appeal and informed about the hardship payments available to them as a matter of right, and not just because they go to their local MP or Citizens Advice Bureau?
• Will the Paymaster General consider writing off all excess and overpayments caused by official error, not just in the past but as part of the system, so that ministers do not have to come to the house and announce amnesties every year?
• Will the Government suspend with immediate effect plans to move a further 800,000 of the lowest income families who currently receive their tax credits from Job Centre Plus to the Treasury's chaotic systems?
• In her statement to the House, is the Paymaster General saying that the Ombudsman is wrong?

At the date of writing this article, there is still some confusion as to exactly how much of the tax credits overpayments are to be written off and for which year. Some commentators state that the system is largely successful, but when child tax credit is paid to 5.8 million claimants and working tax credit to 1.8 million claimants, overpayments to 1.8 million families in a tax year is hardly a minor 'blip' and must surely give cause for concern.

Code of Practice 26

Code of Practice 26 'What Happens If We Have Paid You Too Much Tax Credit?' was first issued in December 2003 and a revised and expanded version was published in August 2004.

It is beyond the scope of this article to go through the various paragraphs of the code, but it confirms the fact that for any tax year provisional awards of tax credits are made and then adjusted when the claimant's income is finally known. Awards may also be adjusted during the year.

The code also refers to the system for paying ATCs in cases of financial hardship. There is information about finalising tax credit awards at the end of the tax year and appealing against any amount due to be repaid to HMRC.

There is also the statement about the promise to write-off overpayments where these have been the result of official error, as mentioned earlier in this article.

The new helpline

One of the recurring complaints about the tax credit system is lack of communication and the inability of individuals to be able to speak on the telephone to a member of HMRC staff. The department has tried to remedy this by setting up a new tax credits technical helpline at Graeme House, Liverpool early in 2005.

It remains to be seen whether this initiative, and others which the department has introduced, will make a substantial difference to the problems currently encountered.

Wider issues

The report by the Ombudsman, current press coverage and comments by members of the professions, beg a number of wider questions, as follows:

• Has it been wise for, in effect, the payment of substantial state benefits to be passed from the Department of Work and Pensions to the Inland Revenue? HMRC is a tax-gathering department and not a benefit-paying department and one questions whether the mindset of its officials is one of compassion and help to the underprivileged. Was the initial decision made on the basis of political considerations and the desire to increase the portfolio of the particular minister involved?
• Experiences to date highlight the fallibility of a computer only system. A computer is merely a machine. It is only as good as its operator, the information input into it and the program devised. All these aspects have been sadly deficient in this instance. In addition, a computer can break down. The tax credits system contains no claimant files or paper backup and there is fragmentation of information. It must be true that the dehumanisation of the claims and appeals process has contributed to much of the disarray highlighted in the report of the Ombudsman. To blame the 'computer system' is disingenuous.
• It is difficult for claimants to believe that there is no communication or relationship between the tax credit claims and their income tax file within the HMRC.
• The system, based on provisional awards and end-of-year adjustments, as well as in-year adjustments, lends itself to injustices, hardship and dispute.
• Finally, one has to question whether the tax credits system really works. It is acknowledged that, as stressed by politicians and others, much has been done to deal with poverty, child or otherwise. However, the payment of child tax credit to middle earners with joint incomes of £50,000 or more must be something of an anomaly. At the time of writing this article, it has come to my attention that some MPs have been claiming child tax credit quite legally by reducing their parliamentary salary by the payment of pension contributions and gift aid charitable contributions.

On the other hand, one questions whether working tax credit in fact produces a disincentive for lower paid workers. As their earnings increase, tax credit is reduced by 37 pence for every £1 for income over certain figures, and this applies to child tax credit as well. If one also takes into account basic rate income tax and National Insurance, the marginal effect of increasing income or earned income is very marked and maybe a positive disincentive and completely contrary to the purposes of the Government.

Conclusion

In addition to the writing off of substantial tax credit overpayments, HMRC paid compensation of £309,000 in 2003-2004 and £912,000 in 2004-2005. The costs of putting right the mess highlighted by the Ombudsman are enormous. It is understood that 20% of potential claimants for child tax credit and working tax credit still do not apply and one of the anecdotal reports in the Ombudsman's report refers to the situation where a former claimant is withdrawing from the system because of her experiences.

I have completed a rough calculation of the number of HMRC staff involved in tax credit work and this totals a little less than 9,000. Even if the salaries paid were only modest, the staff costs alone must total around £130 million.

Those of us who have actually completed tax credit claim forms will realise how complicated they are, even for professionally qualified people. How on earth individual claimants cope with them remains to be seen. This brings me back to recommendation 12 of the Ombudsman:

'The Revenue should reconsider the way it organises delivery of tax credits, in order to deliver a better, more complete service to the customers it now serves. A different model is needed in complex cases and where something has gone wrong. More sustained and informed communication with customers about their case is essential, as is the whole case approach to investigation to ensure the tax credits award is correct.'

This sums up the whole issue nicely.

John Newth is a former deputy editor and consultant editor of Taxation magazine. He won the 'Tax Writer of the Year' award at the Taxation Awards 2005.

Issue: 4017 / Categories: Comment & Analysis