1 Overpayments of Tax Credits
1. HM Revenue and Customs (the Department) has paid
some £45 billion in Child Tax Credit and Working Tax Credit
Schemes (new Tax Credits) since they were introduced in April
2003. The Department paid £15.8 billion of this in 2004-05
to 5 million families.[7]
2. Overpayments were an inherent feature of the scheme.[8]
A Tax Credit award is provisionally based on a family's income
and circumstances from preceding tax years. The final award will
be lower than the provisional award if income has increased, but
up to now, the Department has sought to recover overpayments only
where incomes increased by over £2,500. From April 2006 the
scheme should be easier to administer as a result of changes in
the disregard but it is impossible to draw a firm conclusion yet.
3. The Department overpaid some £2.2 billion
in 2003-04 to some 1.9 million families, about one third of families
claiming Tax Credits. The Department does not yet know the level
of overpayments for 2004-05 awards, but estimates that it is likely
to be similar to those for 2003-04.[9]
4. When the schemes were designed, the Government
expected one million overpayments in the first year falling to
750,000 in subsequent years.[10]
In practice, the scale of overpayments has been much higher. The
Department explained that this was because income rises in excess
of the £2,500 threshold have been greater than anticipated
and that many families underestimate their expected income when
notifying the Department of a change in circumstances.[11]
But the Department has limited information to allow a full analysis
of the cause of overpayments.[12]
5. Recovery of overpayments does not automatically
take individual circumstances into account[13]
and has caused considerable distress to some families. Many of
these are amongst the most vulnerable in society and face severe
difficulties in trying to repay the money. Claimants can make
repayments over several years to alleviate hardship, and the Department
expects to take until at least 2009-10 to recover overpayments
from 2003-04.[14] It
recognises that it will not recover all of them and has provided
for some £1 billion of doubtful debts at March 2005.[15]
6. In 2004-05 the Department faced severe difficulties
in managing some 217,000 disputes against the recovery of overpayments.
The Department employed some 8,200 staff in managing the scheme
and redeployed staff resources from other work to deal with Tax
Credit problems. The Department has concerns about whether this
created risks in other areas and explained that with the benefit
of hindsight, it would have been more conservative in using Pay
As You Earn income tax staff.[16]
Errors in the administration of Pay As You Earn were highlighted
in the C&AG's Report which noted that each year at least £575
million of tax due is not being pursued and that taxpayers are
not being advised of some £295 million due to them.
7. The design of the new Tax Credits necessarily
resulted in overpayments, but there have also been unforeseen
overpayments. A number of software errors, for example the omission
of one partner's income in the processing of joint claims[17]
resulted in overpayments of £184 million in 2003-04 and 2004-05.
The Department is continuing to investigate the reasons for other
incorrect payments caused by system miscalculations.[18]
8. As the Tax Credits computer system is very complicated
and fragile, the Department has been cautious in making changes.[19]
The Department did not feel it knew enough about the computer
system and considered that it was still a cause of concern.[20]
Changes to the Tax Credit scheme
announced in the Pre-Budget Report
9. The Pre-Budget Report on 5 December included important
changes to the Tax Credits scheme, which are intended to reduce
the level of overpayments. The main change is that from April
2006 the Department will disregard increases in income between
one tax year and the next of up to £25,000 when finalising
awards. The full effect of the measures will not be seen for some
time, and the Department will have to manage the challenges of
the existing system for 2005-06 awards which will still be subject
to the existing £2,500 income disregard.
10. The Department could not say how much it would
cost to increase the income disregard threshold from £2,500
to £25,000. It noted that the difficulty in accessing good
quality data makes costing the individual elements of the package
difficult.[21] The cost
is likely to be significant, because the Department calculated
that the final entitlement to Tax Credits for 2003-04 would have
been £800 million lower without the existing £2,500
disregard.[22]
11. Other changes announced in the Pre-Budget Report
are designed to help keep claimant records up to date and reduce
the build up of overpayments. The Department will require applicants
to notify it much more promptly about changes in circumstances.
It will also be more pro-active in contacting certain applicants
to ensure their records are kept accurate. The Department stressed
that it faced a big challenge in communicating with applicants
to ensure these changes were successful.[23]
It expects these changes to reduce overpayments by one third.
12. The Government also announced that from November
2006 automatic limits would be placed on the recovery of overpayments
when awards were adjusted within the year following a reported
change in circumstance. These overpayments had been recovered
at a faster rate than those identified after the year end.[24]
The Department was, however, unable to estimate the full extent
of the recovery of in-year overpayments.[25]
7 C&AG's Report, para 2.6 Back
8
Q 57 Back
9
C&AG's Report, para 2.13 Back
10
Q 25 Back
11
Q 25 Back
12
Ev 14-15 Back
13
Q 156 Back
14
C&AG's Report, para 2.11 Back
15
ibid, para 2.49 Back
16
Q 78 Back
17
C&AG's Report, para 2.25 Back
18
ibid, para 2.24 Back
19
Q 12 Back
20
Q 11 Back
21
Ev 14-15 Back
22
C&AG's Report, para 2.10 Back
23
Q 68 Back
24
Q 73 Back
25
ibid Back
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