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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