1 ADMINISTRATION, COMPLEXITY
AND PUBLIC UNDERSTANDING
1. The Government replaced the Working Families and
Disabled Person's Tax credits with the Child Tax Credit and Working
Tax Credit (New Tax Credits) in April 2003. Some 5.7 million families
received New Tax Credits during 2003-04 at a cost of approximately
£16 billion. Of these, several hundreds thousand claimants
were overpaid New Tax Credits mainly because of the inherent design
of the schemes, but also because of software errors.
2. The design of the system inevitably results in
overpayments to many claimants. The Inland Revenue (the Department)
makes provisional Tax Credit awards based on a claimant's income
for an earlier year. The final award is assessed on actual income
for the year. Tax Credit entitlement is reduced by 37p for every
additional £1 of annual income over certain limits. Incomes
tend to increase from year to year, so the final award is often
lower than the provisional award. Except where caused by error,
the extent of overpayments reflected claimants' improved economic
circumstances.[9] Software
errors in the New Tax Credits system have resulted in overpayments
of £174 million to 540,000 of the overall 1.8 million claimants
overpaid.
3. The Department usually seeks recovery of overpayment
from future Tax Credit awards in order to ensure that people get
no more than they are entitled to. If repayment would cause the
claimant hardship, the Department may waive all or part of an
overpayment of Tax Credits, or allow more time to pay. But the
Tax Credit IT system could not stop the recovery of overpayments
while the staff considered hardship cases. The Department planned
to start to change the system in the autumn of 2005 to prevent
this automatic recovery of overpayments in some circumstances.[10]
4. The Department has written off amounts where the
individual overpayment was £300 or less, and has sought recovery
of amounts above £300. The Department writes off overpayments
over £300 only where it considers that it was reasonable
for a claimant to believe that their Tax Credit award was correct.
It wrote off £37 million in 2003-04 and expected to write
off similar amounts of overpayments in 2004-05.[11]
The Department established the £300 threshold by reference
to the costs of recovery. The Department is doing more work to
improve its understanding of the administrative cost structure
to see whether it should revise the write off limit.[12]
1. Members of Parliament and organisations such
as the Citizens Advice Bureau have been inundated with complaints
from claimants who have found the New Tax Credits scheme complex
and who are unsure how much they are due. The situation has been
exacerbated by departmental staff who have advised people to contact
their Member of Parliament so that their case would be considered
more quickly.[13] The
Department considers it debateable whether these were typical
of the wider story, but without being able to demonstrate that
they were not.[14] 5.
6. It believed that it needed to go through two
or three annual cycles before making a judgement as to whether
the system had met the expectations of Parliament.[15]
7. New Tax Credits have also proved complex and costly
to administer. In 2003-04, the Department employed around 7,300
staff on New Tax Credits work and the full administrative cost
was £403 million.[16]
8. The Department's target for the accuracy of processing
and calculating Tax Credit awards was 90% in 2003-04.[17]
It failed to meet this target and the actual level of accuracy
was only 78.6%. The results are worse than under the previous
scheme.
9. The Department has received many more queries
and complaints on New Tax Credits than it expected. The Inland
Revenue told us that it had found many cases to be complicated
and there were cases where it had struggled to decide on the appropriate
response.[18]
10. Problems with New Tax Credits have adversely
affected tax administration. The transfer of staff from other
duties to deal with New Tax Credits problems, has created a backlog
of work which the Department needs to clear. The diversion of
resources also affected processing quality and accuracy, and the
Department missed the Public Service Agreement target for the
percentage of tax enquiries worked to a fully satisfactory standard.[19]
The Department is seeking to achieve major efficiency savings,
including reducing staff numbers. The challenge is to make these
reductions without customer service suffering.[20]
11. The effectiveness of the Department in assessing
and collecting taxes largely depends on its reputation for accuracy,
fairness and proper handling of taxpayer affairs. The problems
in administering Tax Credits have affected the public's perception
of the Department, as it acknowledges.[21]
12. Claimants who have encountered problems can complain
to the Department. By the end of 2003-04 there were 32,000 complaints
in respect of Tax Credits and since then there have been tens
of thousands more. The Department have tried to publicise the
availability of appeals and the opportunity that individuals have
to complain, as well as the factors people can use in presenting
an appeal.[22] It provides
claimants with details of the policy for handling complaints in
the Code of Practice 1, Putting Things Right which the
Department sends out with award notices. Claimants have no further
appeal against the decision of the Department, whose judgement
is final.[23]
13. The Department pays compensation to people who
have suffered most from the problems with New Tax Credits. These
payments are made to claimants when Departmental mistakes and
delays have caused people worry and distress or have resulted
in claimants incurring additional costs. In 2003-04 an average
of £34 was paid to 10,800 people.[24]
Further compensation has been paid in 2004-05 and the average
has almost doubled. The Department told us that the level of compensation
paid was never adequate for the hardship and suffering which people
had gone through, and that it was a way of saying sorry.[25]
9 Q 3 Back
10
Q 125 Back
11
C&AG's Report, paras 2.10-2.13 Back
12
Q 56 Back
13
Q 123 Back
14
Q 133 Back
15
Qq 4, 57 Back
16
Inland Revenue Trust Statement 2003-04 Note (3(iv)), (HC 1062,
Session 2003-04) Back
17
C&AG's Report, para 2.18 Back
18
Q 15 Back
19
C&AG's Report, para 2.35 Back
20
Q 19 Back
21
Q 114 Back
22
Q 105 Back
23
Q 108 Back
24
C&AG's Report, para 2.15 Back
25
Q 139 Back
| 
