Select Committee on Public Accounts Minutes of Evidence


Examination of Witnesses (Questions 40 - 59)

MONDAY 24 JANUARY 2005

INLAND REVENUE

  Q40  Mr Bacon: You say, "The function is at least 10 years old and was set up at a time when we were clearing around 99% of our open cases before they became three years old". Why "at least"? Do you not know when this function was introduced? Thirty-three years old is also "at least 10 years old". How old is this function?

  Mr Varney: I do not know; I am quite happy to write to you. "At least 10 years old" was meant to convey it was a well-established process but I can find out and write to you[2].

  Q41 Mr Bacon: It has been causing havoc for years, in other words?

  Mr Varney: No. In the period of time in which it worked cases were closed within the three years.

  Q42  Mr Bacon: 99% were.

  Mr Varney: Well—

  Q43  Mr Bacon: But even when it was only 1% it sounds to me like they were an inconvenience that was difficult to follow up so they were being struck off as if they did not exist any more.

  Mr Varney: If it gives you that impression, that is the wrong one. We have revisited, as I said, the rules for holding information and we will now hold information for six years. We do not wish to see information disappear out of the system, for all the reasons you have identified.

  Q44  Mr Bacon: In your letter you talk about the difficulty in contacting the people. You say you estimate you need to mailshot three million to get to the 638,000. How do you identify that it is three million? Who are they? And why three million to get to 638,000?

  Mr Varney: We go through the process we use to get to the three million. It is basically a statistical judgment of, in order to get that number, what number do we need to mailshot? If we look at our last mailshot which we did to a million people, about 20% of people replied. The people who tend to reply are those whose affairs are in order, so we ended up with 1% getting an actual payment in settlement. So when we looked at the likely success rate of the mailshot it was clear it was going to cost us about £3 million to do the mailshot in order to distribute about a million pounds at most.

  Q45  Mr Bacon: Because of the response rate you got?

  Mr Varney: Yes.

  Q46  Mr Bacon: Forgetting for a minute the response rate regardless of how many people would or would not contact you, what is your estimate of the total amount of payments that you have not made and the total amount of receipts you have not received?

  Mr Varney: We estimate that the 364,000 people who are owed money have an average repayment due of £226, about £82 million overall, and we believe 22,000 people may have an underpayment of about £259, which means they owe us about £5.6 million.

  Q47  Mr Bacon: I can understand why you have difficulty in contacting them but can you not simply, when you send out tax forms, put a stamped message on the front effectively advertising to anybody without any additional cost?

  Mr Varney: The problem is you would be hitting 30 million people and, as we know, any message that goes in is likely to cause confusion unless it is well-targeted. Also, individuals have their P45s, and those who think they have been affected have the data because they have gone off the system because we have not closed out their earnings.

  Q48  Chairman: Thank you, Mr Bacon. The Committee owes a debt to Mr Bacon for flagging up to the media paragraph 1.16 and ensuring there has been a lot of public interest in this, but you are now giving the commitment, are you, that you have systems to spot these problems in future?

  Mr Varney: I think so. We have looked at and I would be very disappointed if we fail to learn the lessons. That is what we have been trying to do. I am disappointed also in saying that we had the problem in the first place.

  Q49  Mrs Browning: Mr Varney, the working families tax credit and the disabled persons credit were the predecessors to the tax credit systems you run at the moment. Am I right in recalling that they were administered through employers' payroll systems?

  Mr Varney: Substantially.

  Q50  Mrs Browning: Do you know what the incidence or aggregate amount of overpayment was when they were administered by employers?

  Mr Hartnett: I am afraid I do not think we can break it down into the amount that was overpaid just through employers, but at a previous hearing, Sir Nicholas Montague explained there had been an extrapolation of the whole WFTC and disabled persons tax credit and that extrapolation amounted from memory to an overpayment of between £510 million and £700 million a year in the year in which it had been done.

  Q51  Mrs Browning: What was the process, then, for recovery of those overpayments when it was run through the payroll?

  Mr Hartnett: There was not a process because that was an extrapolation, and in order to identify individuals where money had to be repaid we would have had to review every single award of WFTC and DPTC, but what we have done is taken every opportunity where we have looked at a claim for any reason to see where there was an overpayment and, if so, pursue it.

  Q52  Mrs Browning: So when you took over the working tax credit and the child tax credit through the Inland Revenue you were already alert to some of the problems which can occur with overpayment and reclaiming that overpayment from the claimants?

  Mr Hartnett: We were alert because we had been the Department that brought in WFTC and DPTC in the first place and we knew the risk of overpayment; we discussed this with our colleagues in what is now the DWP as well so we were certainly alert to the risk, but the nature of WFTC and DPTC was such that as an interim tax credit they did not lend themselves to identification of individual cases.

  Q53  Mrs Browning: Would you agree that there is obviously a possibility of over or underpayment when there is a key change in the family circumstances financially, but that in setting up this system and getting it under way with the IT systems you have procured there appears to have been very little in terms of lessons learned in the procurement of the IT systems which you now use which have caused a lot of the problems that we see identified on page 124 in figure 6?

  Mr Varney: The IT systems have clearly played a role and we have discussed that with the Committee. The last release we did which was Release 4, which was a major release, went much more smoothly, and for the renewal process, although it is right to draw attention to this and it is absolutely clear that attention will need to be focused on under and overpayments of the annual system, the technology is functioning better than it was. There is no cause for complacency but it is moving in a better direction.

  Q54  Mrs Browning: Mr Varney, can I just probe you on this question of the 82,000 where you are seeking to recover £57 million? We know that you are writing off cases below £300 although that aggregates to £37 million, a considerable shortfall to the Exchequer, but presumably the £300 threshold is because of the costs in actual recovery. It is nothing to do with the unfairness of what has happened to the individual families concerned.

  Mr Varney: That is correct.

  Q55  Mrs Browning: So may I bring you on then to these 82,000 people? You mentioned to us earlier about what was reasonable, a word that occurs in very frequently in the law courts, the interpretation of "reasonableness". If somebody is on lower incomes, and these credits are targeted to lower income families because of the recognition of their need of tax credit, if you had to recover £300 from them, hard as that would be, in terms of the hardship that recovery would cause an individual family, it is likely to be a lot less traumatic than some of the casework which my case worker deals with just in the constituency cases I deal with. How are you going to judge reasonableness without referral to the courts, because you obviously have access to income but do you make some form of assessment of capital or some assessment in terms of whether these people own their own homes? What is the process going to be? Are you going to get to the point where people are going to lose their homes in order to repay some of these larger sums?

  Mr Varney: I hope not. Can I just stand back—

  Q56  Mrs Browning: Is that a policy or a hope?

  Mr Varney: I think we tread seriously in trying to consider each case, and that does require making a judgment about where compassion is merited. Can I just stand back and talk a little about what you asked me to start with and see if I can give you an insight into the way we are thinking? When we were confronted with this problem, we tried to analyse what was the cost involved in the Department in recovering the amounts of money over the range of the overpayments, and that has proved to be quite difficult but we came to the conclusion that £300 was the right place to draw the line in terms of not pursuing. Given what we then understood about the costs in the Department and also about the reaction of claimants to pursuing overpayment, I have more work going on in the Department to improve our understanding of our cost structure and see whether I want to revise up the amount that I am prepared to write off because it is not in the interests of the Department and public expenditure to pursue it, so I will keep that under review, and that is a process where we are learning and asking much more of our cost information than ever before. As far as individual cases are concerned, we then under our code of practice are limited about how quickly we will recover the overpayment depending on the circumstances of the individual. Now if, having done that, somebody still thinks it is unfair then we will review it, and if they do not agree with the answer they can appeal. Many of the most difficult cases, as you say, come to your offices and your case workers. We put resources into improving our performance in answering your questions, but many of the cases you get are the most complicated and the most difficult and they come to me before I finally reply to you to try to make sure we have quality control over the judgments that are made, but these are difficult areas and sometimes we get it wrong.

  Q57  Mrs Browning: They are difficult and my own quality control is that every case I get my case worker is required to pass to you via the Minister's office, because in terms of quality control in this place it is very important that ministers have a clear understanding of the on-going problems that Members of Parliament and their constituents are facing in this area. Given the complexity of tax credits, however, was it ever realistic to expect claimants to keep the Department updated of changes in their circumstances? It is not quite like somebody on income support who suddenly gets into employment and knows if he gets a job and he has been on unemployment benefits he really does have to let Jobcentre Plus know. That is fairly straightforward and reasonably understood, although it is subject to fraud and so on, but given the complexity of some of the significant changes that might happen within a family relationship and circumstances, is this really realistic?

  Mr Varney: I think the two areas where Parliament made a judgment was the £2,500 dead zone in which there would be no change if income improved and, secondly, the three months' toleration of importing changes in the family. As I said earlier to the Chairman, I think I would like to have more experience of this system actually working before I express a view on whether the operational experience of the system had met the expectations of the Parliament in designing the system.

  Q58  Mrs Browning: I think sometimes in this Committee it would be quite helpful if we had a Minister sitting where you are sitting today—and you need not comment on that!

  Mr Varney: Thank you!

  Q59  Mrs Browning:—but I would just say this: in a climate where, as Members of Parliament, we are concerned about people on lower incomes and the amount of indebtedness that families incur in those lower income ranges, it does seem to me that an experience like this compounds an awful lot of problems for people when they suddenly think they have some money, they spend it and then find they were not entitled to it in the first place, and I just wonder, and this is why the question perhaps should be more fairly put to a minister, when my constituents receive an overpayment from you in future, should I caution them to put it on deposit and for how long, until they can feel really confident it is theirs to spend?

  Mr Varney: I could not possibly comment what the Minister might say but what I can say is that the briefing draws attention to the fact that there are millions of families up and down the country who have notified of changes in circumstance and are receiving the benefits neither with an overpayment or an underpayment.


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