Select Committee on Public Accounts Minutes of Evidence


Memorandum submitted by the Citizen's Advice Bureaux

TAX CREDIT OVERPAYMENTS AND RECOVERY

  Citizens Advice Bureaux (CABx) across England, Wales and Northern Ireland dealt with 134,000 tax credit enquiries in their first year of operation (2003-04).The two most frequent tax credit problems reported by CABx relate to general poor administration by the Inland Revenue and to problems associated with overpayments and their recovery. Citizens Advice currently receives approximately 300 reports about overpayments and recovery every month.

  Members of the Committee will have received a letter on behalf of a number of organisations including Citizens Advice,[11] expressing our concern about the harsh recovery of overpayments that have resulted from mistakes made by the Inland Revenue. In this briefing we would like to provide Members with a few examples that illustrate the unreasonable hardship, confusion and anxiety experienced by CAB clients who find themselves in overpayment situations.

  We are concerned about what CAB evidence suggests is the thousands of overpayments that have resulted from mistakes by the Inland Revenue or as a result of the Revenue failing to respond to claimants reports of changes to their circumstances. Once made, it is the claimant's responsibility to spot errors. If unable to spot them, they will later need prove that it was reasonable for them to have believed their award was correct if the overpayment is to be written off.[12] This is very difficult for claimants who commonly struggle to understand their entitlement in a system that is new and using award notices that contain inadequate information. In many of the cases reported by CABx it is unclear how overpayments have arisen and claimants do not understand by how much their future payments will be reduced to recover these overpayments.

  We believe that a more sympathetic approach is needed in dealing with recovery of overpayments. Where claimants are disputing recovery on official error grounds, we are not confident that the current decisions are being made fairly and would like to see an independent audit of Inland Revenue decisions that apply the reasonableness test.

SPECIFIC ERRORS AND POOR DECISION MAKING

  In addition to the specific computer error that in April and May 2003 caused 450,000 households to be overpaid a total of £94 million,[13] there has been an error that has caused the income of one partner in a couple to be lost from the records. Many CABx have seen clients who did not notice the deletion of the income figure and in some cases the income correctly appeared on the award, but had not been used in the calculation. The error only came to light when their payments were suddenly cut and they were informed that they had been overpaid.

  A CAB in Staffordshire reported that their client had been informed of an overpayment but did not know why this had arisen. The helpline advised that their information showed that the client worked 40 hours a week but had no income. The client had not spotted this error and he found it difficult to believe that the computer system had not rejected the information as contradictory.

  A Sussex CAB client had been informed that they had been overpaid over £4,000 as a result of an IR error. The husband's income was recorded as nil even though he was recorded as working 37 hours a week. The letter from the Inland Revenue stated that "We have decided that although the overpayment was a result of a mistake on our part it was not reasonable for you to believe that your award and subsequent payments were correct." In order to recover the overpayment the Revenue will simply not pay them for the next eight years (assuming entitlement remains the same).

  Claimants with overpayments resulting from this error received letters from the Tax Credit Office informing them of the overpayment, apologising for the error and advising of how it will be recovered. For example:

    "I am writing to let you know that your tax credits have been overpaid since April because we calculated your award incorrectly, to apologise for our mistake and to explain the arrangements for repaying this money.

  We estimate that the incorrect payments currently amount to £4,293.19".

  A Sussex CAB client received a letter from the Inland Revenue dated 27 August stating that they had overpaid tax credits approximately £600 for 2003-04 and £2,200 for 2004-05. The letter stated that they had incorrectly calculated the clients' award and apologised for the mistake. The client was alarmed by the huge debt they suddenly found themselves with as she said she had always informed the Inland Revenue of any changes to her family's financial circumstances.

  Official figures indicate that by the end of November 2004 67,000 requests for the recovery of overpayments to be reconsidered on the grounds of official error, but only about 1,100 families had had them written off.[14] This seems a very small proportion of cases given that the poor quality of award notices in this first year of operation has meant that errors are very difficult to spot and entitlement very difficult to understand.

  From the CAB cases we have seen, responses to requests are in fairly standard letters where it is difficult to be confident that all the information needed to make a fair decision is taken into account in the first instance. The client who had received the letter, whose extract is quoted above, was told it was not reasonable for her to have believed her award was correct. No full explanation was given and the decision seemed to be based largely on the fact that the amount was so large. The claimant had continually kept the Inland Revenue up to date with her changes of circumstances even though she'd had a had a nil award for most of the year. A change in May had generated the lump sum back-payment and an award for the current year. Her award notice showed the correct household income and the amount she received matched the amounts listed. With no information on how awards are calculated, it does not seem reasonable to have expected the claimant to know that this was wrong.

LUMP SUMS PAID IN ERROR

  It may be reasonable to expect claimants to be able to spot large sums paid in error, but CABx have reported cases where claimants have been uncertain about monies paid, queried it with and received reassurances from the helpline, only to be later asked for the money back. It is important that when the Revenue makes decisions about whether claimants' overpayments should be recovered that they take account of what advise they have received from the helpline.

  A Midlands CAB reported couple with two children who had been paid a lump sum of £3,500 by the Inland Revenue in the spring of 2004. She returned the money as didn't believe she'd been underpaid. The Revenue insisted it was due and paid it a second time. When she returned it a second time the Revenue contacted her insisting it was hers and paid it a third time. A couple of months later she was notified that she had been overpaid by £4,900. During 2003-04 a CAB client in Wiltshire had received a lump sum payment into her account around the time when her hours had decreased from 40 a week to 30. It appeared to be a duplicate payment as her working tax credits were normally paid through her wages. She queried it with the helpline several times but was assured that it was hers and she should spend it. Early in the new tax year, she was informed that she had been overpaid and it would be recovered from her future payments.

  Citizens Advice believes that the way that the Inland Revenue are applying the "reasonableness" test as set out in Code of Practice 26, is itself unreasonable. It requires a degree of knowledge and understanding of the tax credits system, which is unreasonable for the vast majority of claimants. We would like to see an independent audit of Inland Revenue decisions which apply the reasonableness test.

OVERPAYMENTS NOT CONNECTED TO OFFICIAL ERROR

  We are also concerned about the number of overpayments that, whilst not originating from Revenue error, have nevertheless come as a shock to claimants who didn't fully understand the new system or their award notices. Claimants can find themselves with overpayments as a result of an increase in income above £2,500 that they haven't reported during the tax year, or as a result of changes to their personal circumstances that they did not report immediately.

  During this first year of operation it looks likely that a large number of overpayments have resulted from these factors. We do not believe that the Inland Revenue succeeded in adequately highlighting the fact that awards were only provisional, based on circumstances remaining as initially reported. CAB evidence suggests that claimants found it difficult to understand their entitlement and how their changes of circumstances would affect their awards. This has not been helped by the lack of relevant information on award notices.







11   Letter dated 14 January from John Andrews of the Low Incomes Tax Reform Group on behalf of the Chartered Institute of Taxation, Child Poverty Action Group, Citizens Advice, the Institute of Chartered Accountants in England & Wales, Low Incomes Tax Reform Group, One Parent Families and TaxAid. Back

12   Code of Practice 26, What happens if we have paid you too much tax credit. Back

13   Inland Revenue Annual Report 2003-04. Back

14   HC Deb, 15 December 2004, c. 1087W Back


 
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