Select Committee on Public Administration Second Report

3  THE OMBUDSMAN'S REPORT

3. In the introduction to her Annual Report in 2004, the Ombudsman recorded a general concern over "…large scale changes in government services, underpinned by significant IT projects, introduced yet again without abiding by the principles of good administration. Too little preparation time, not enough planning and no piloting…".[3] She also had particular and "…growing concerns […] about the operation of the new tax credits system, which we have raised directly with the Acting Chairman of the Inland Revenue".[4] In fact, the number of complaints about tax credits has come to represent a rising proportion of her workload, from 3% in 2003-04 to 9% in 2004-05. By July 2005 this had risen further to 23%. When the Ombudsman came to give evidence in December 2004 she told the Committee that she had "been monitoring this [tax credit complaints] very, very closely, but I think we are now starting to pull together what may turn into a special report on tax credits because I think there are big issues there".[5]

4. On 21 June 2005 the Ombudsman duly made her report. She concluded that, while the new tax credits system was not in general disarray, the cases investigated raised concerns about the treatment and recovery of overpayments. It was also clear that a "significant number of families were affected and that the level of financial hardship and distress being caused to some was considerable".[6] The report urged prompt action on the part of the Revenue and made twelve specific recommendations for improvement.[7]

The key problems

5. The cause of many of the complaints about the tax credit system can be traced to three main factors. First, the awards are annual and therefore "the system has an element of financial uncertainty built into it, sometimes causing significant problems for people who have to plan carefully to manage their family budgets".[8] The system was consciously designed to overpay claimants and made provision for a subsequent adjustment. However, this claw-back mechanism was compounded by numerous clerical and IT errors which led to further demands for recovery of tax credit awards to the detriment of claimants. As Mr (now Sir David) Varney (Executive Chairman, the Revenue) explained to us:

Overpayments are an intrinsic part of the system that Parliament approved …. The expectation was that there would be a million overpayments in the first year of running new tax credits and that would go down to 750,000. The computer problems which have dogged us exacerbated that number.[9]

6. Second, the delivery of the tax credits system is designed to be wholly IT-based with minimal, if any, clerical input. Consequently the success of the scheme relied on the near faultless implementation of the IT system which underpinned it. This did not occur. The Ombudsman's report catalogues how what was originally conceived as a more efficient processing system was instead "plagued with significant and extensive technical problems which […] impeded performance".[10] These included two major software errors. Some 455,000 households received duplicate payments when the system failed to recognise that the manual payment had already been made. There were £45 million of overpayments to 60,000 couples whose change in circumstance led to the second partners having their income zero-rated. In addition there were a whole range of other IT problems affecting the system or surrounding individual cases.[11]

7. Third, and in large measure as a result of this over-reliance on a fully automated IT system, the Revenue has been unable to respond effectively when things go wrong, nor has it taken proper account of the particular needs of individual customers. In this case the financial situation of a significant proportion of that client base was wholly different to that of the taxpayers—individuals and businesses—with which the Revenue has traditionally dealt. The Revenue failed to understand that they were now dealing with a significant minority of recipients for whom regular and accurate payments are vital. As the Ombudsman told us: "I think the difference for me, and this is really, it seems to me, at the heart of it, these are new and different customers and these are not people for whom sorting it all out at the end of the year will do".[12]

Design and delivery

8. The essence of the scheme is that entitlement is calculated on an annual basis. Initially, awards are based on income for the previous year and current circumstances. A change of circumstances must be reported by the recipient and the award adjusted to reflect this. An end of year reconciliation identifies any underpayment, when a lump sum can be paid, or overpayment. Overpayments are usually recovered by reducing the tax credit award for the following year. However, 'excess payments' identified during a tax year, which, if continued at the same rate, would result in an overpayment at the year end are recovered by in-year adjustments.

9. Overpayments will not be recovered in certain circumstances: where they occurred as a result of official error; where the claimant could not reasonably expect to know they were being overpaid; or where a waiver is applied on grounds of hardship.[13] Additional payments can be made, on request, on grounds of hardship or where there are reasons to think a possible overpayment should not be recovered. These discretionary payments are themselves recoverable in the following year.[14]

10. This complex system is predicated on the assumption that the recipient must take responsibility for their own claims. It also assumes what the Ombudsman terms a "savings buffer" to smooth out any over or under payments which is far removed from the financial reality of many families in receipt of tax credits.[15] Mr Varney conceded that the Revenue was not looking at changing the balance of responsibility between the client and the Revenue:

What we are looking at is whether we can improve the way in which the information is presented, the clarity with which it is presented and to eradicate duplicate notices, to see whether it is possible to provide a story of what is happening in a coherent way. That is to enable the individuals to better fulfil their responsibilities.[16]

11. However, the Ombudsman is unconvinced:

For me one of the interesting areas is the difference in perspective perhaps that we have around what is the major problem. The cases we are dealing with primarily are about official error. When we talk to the Revenue they seem to be talking about customer error. Making that fit together I think is going to be quite interesting. There is almost a sense that if customers can be supported in notifying changes of circumstance and understanding the implications of not doing so that somehow it will come right. I am not so sure about that.[17]

12. We agree. Moreover if the customer is to be expected to exercise their responsibility effectively then the information they are given must be clear, straightforward and readily understandable. The Ombudsman notes that central to many of the problems with the scheme is the multiplicity and sheer unintelligibility of award notices which make it impossible for customers to work out their entitlement.

13. The Revenue explained to us it will introduce changes to make award notices clearer. Ms Walker (Director of Benefits and Credits) described how the rules governing the scheme were being revised:

What we are looking to do in the review of our code of practice is to be a little bit more explicit about what we expect people to be able check on the information we sent them and what we do not expect them to be able to check.[18]

14. Mr Gray (Deputy Chairman) said it was also the intention to summarise the case history in one place:

...we are looking to provide additional information, with the shorthand-type term of playback, seeking to summarise in one place, on one piece of paper, at the renewal time, 'Here is the sequence of events and the reasons why we think your entitlement has changed and, therefore, by implication, why you may in the previous year have had an overpayment or an underpayment'.[19]

However, this will not be possible until the 2007 renewal cycle.

Fettered discretion

15. At the heart of the case for maladministration lies the fact that automatic recovery of overpayments takes place contrary to the Revenue's own Code of Practice (COP). The Ombudsman states that:

a fundamental unfairness arises where recovery of an overpayment takes place to the detriment of a customer before COP 26 has been considered. Effectively, the Revenue has fettered its own discretion by making an initial determination to commence recovery action, before it has considered the full facts of the case. That is maladministration.[20]

16. She describes a seemingly remorseless system for recovery of overpayments which "is simply part of an automatic rolling mathematical re-calculation of an award by the tax credits computer system to ensure its accuracy at year-end".[21] In fact, as she told us: "There are issues of hardship to consider".[22] Consequently she has recommended a pause between the identification of an overpayment and starting to recover it to provide an opportunity for recipients to challenge the decision to recover overpayments.

17. We are also concerned that the design of the system has led to maladministration being systemic. The Ombudsman set out a clear definition of what systemic maladministration entails:

When we uphold a complaint, it is because we have found maladministration and injustice in that complaint. Therefore, if we uphold substantial numbers of complaints about tax credits, we have found maladministration in a large number of cases. If it is the same maladministration, it is systemic.[23]

18. Mr Varney did not accept that the maladministration was systemic and seemed to find the suggestion of a pause between the identification of an overpayment and recovery impracticable. The Ombudsman had drawn:

…attention to a particular facet of the operation, which was our practice of starting to recover overpayments from continuing situations, without checking whether there is a valid reason why the overpayments should not be repaid and said that constituted maladministration. That caused me real difficulty not because I dispute the right of the Parliamentary Ombudsman to make such a finding but because I cannot accept that it is maladministration to operate a system in the only practical way that will provide an efficient service to protect the public purse.[24]

In fact we are encouraged by the fact that the Revenue does not object to the principle of introducing a pause although it is worried that this can be done without upsetting the stability of its IT system. Mr Varney assured us that "The issue of whether we can introduce a pause and whether that would provide a better administrative and more satisfactory outcome from all perspectives is one we are looking at seriously".[25]

19. We welcome the Revenue's willingness to look at the Ombudsman's recommendation to introduce a pause before starting recovery of overpayments. However, we are concerned that, not for the first time, a government department, is presuming to define what constitutes maladministration. Moreover the Revenue seems to suggest that protection of the public purse overrides other considerations, including fairness. Public services cannot be designed or delivered without regard to costs but an unfair system, while it may well be cost-effective, cannot be said to constitute good public administration.

Inflexible IT

20. The problems identified with the operation of the scheme have been compounded by the fact that some of the solutions which would overcome some of the difficulties are hard to introduce quickly without risking the stability of the IT system. Mr Varney explained that the Revenue was looking seriously at the prospect of introducing a pause between notification of an overpayment and its recovery. However, he warned, "On the computer front, we know it will take until some time next year to get the functionality in. The computer system is stable. Every time we make a change to it I want to be absolutely sure it does not create more problems than it solves".[26] Similarly when describing the intention to add information in the annual renewal cycles which would summarise the client history of payments, Mr Gray acknowledged that "to automate that process is extremely complex and we will not be able to do that unfortunately for the 2006 renewal cycle. We are looking to have that facility in place in good time for the 2007 renewal cycle".[27]

21. There is consensus that there can be no quick fixes. The Ombudsman believes:

that given the scale of the problem as described in the report, there are no quick fixes here. I would also say in all seriousness that one of the things that concerns me as a Parliamentary Ombudsman is seeing changes, improvements, new systems brought in in impossible timescales in order to fix problems when actually they need longer than that to fix and that trying to do things in impossible timescales just makes it worse. I think there is something of a long haul here.[28]

22. We are concerned that the IT system which is supposed to enable an efficient delivery of the scheme has in fact been a root cause, first of creating some of the problems which have led to the criticism and complaints about the scheme and then of acting as a barrier to resolving them quickly. Careful consideration needs to be given to the design of future government IT-enabled schemes so that it is the needs of the customer rather than the limitations of the technology which are paramount.

23. Mr Varney wrote to the Chairman about the settlement the Revenue has reached for their claim of compensation from Electronic Data Systems Ltd (EDS) for the problems experienced with the IT system for the Tax Credits scheme. It includes a significant confidentiality requirement which may limit his ability to answer questions. We would be very concerned if such an agreement prevented us, or any Committee, pursuing matters in which we had a legitimate interest. It would be intolerable if accountability could be evaded by entering into a contract with a private provider.

Understanding the customer

24. The Ombudsman acknowledged in her report that, given the scale and complexity of the project "the introduction of the system was, for the most part, successful".[29] It affects around six million families. However, as far as the bulk of the problems were concerned "…this is about people on low incomes, usually with children for whom these payments matter in terms of their weekly budget".[30] In her evidence to the Committee the Ombudsman, commenting on the nature of those most affected by the problems over the system, told us:

I think the difference for me, and this is really, it seems to me, at the heart of it, these are new and different customers and these are not people for whom sorting it all out at the end of the year will do. … Unless the Revenue really grasps this and puts itself in the position of the people on the receiving end of their award notices and their automatic recovery, then actually I think there are fundamental problems, so that is the challenge for the Revenue, to see this from the other side.[31]

25. The Ombudsman put the problem to us in graphic terms:

It is this shift, I think, towards a full understanding of the customer base and just what it means to be in receipt of one of those notifications in relation to recovery of overpayments, what it means in terms of what you are going to put on the table for tea tomorrow.[32]

26. One consequence of the setting up of the tax credit scheme was the transfer from the Department of Work and Pensions (DWP) to the Revenue of a new group of customers who rely on these payments for their family income and who hitherto had been able to rely on the security and stability of benefits payments. These customers thus bring distinct needs which the tax credit scheme has to take into account. Mr Varney told us that the sheer scale of the operation, however, made this sort of targeted approach to the most vulnerable recipients almost impossible to administer:

We physically could not operate a system that required us to check every case and see whether there was a reason, either because of official error or because of hardship, why we should write off the overpayments. That is the reality of the system that is dealing with millions of people. The fact is the vast majority of overpayments are properly recoverable.[33]

27. We are concerned that the consolidation of the tax and benefits systems represented by the tax credit scheme and the consequent transfer of functions from DWP does not appear to have resulted in any assessment on the part of the Revenue about the nature, and the needs, of this particularly vulnerable group among tax credit recipients for whom regular and reliable payment is not a desirable budgeting convenience but a real necessity.

Absence of customer support

28. It seems to us that much of the ill-feeling which the tax credit system has generated among recipients, the advisory community, Members and others could have been avoided if appropriate customer support had been available from the start. However, the Revenue's failure to understand the true extent of its responsibilities towards its new clients, and the faith placed on the efficacy of its IT-based business processes, meant that no such support was designed into the scheme. In erecting a complex and at times unintelligible system, it has failed to provide the casework capacity necessary to help and advise recipients when things have inevitably gone wrong. As the Ombudsman states in her report:

Effectively, there is no oversight of the whole of an individual's case—either the different aspects of a case being worked on, or its evolution over time. This leads to a fragmented and inadequate response when a problem arises, with delays in establishing the root cause of a problem and poor communication with customers about what is happening.[34]

Mr Varney conceded that "There is a problem in that the system was not built to have a case work structure in it".[35] We agree. Worse, the Revenue's ability to reconstruct individual cases and telephone records is ponderous and inefficient. Mr Gray described how:

If an overpayment is disputed and there is a doubt about what exchanges have taken place, part of our procedures for a full investigation, looking into that dispute before we reach a judgment on it, quite often involves calling back the telephone records from the contact centre network and listening to validate what was or was not said.[36]

Mr Varney then clarified that:

This is not gee whiz, Dr Strangelove, press a button and here it comes. There is no digital recording system on this scale that is like that so it requires detective work. It requires obviously the cooperation of people, some of whom will have very clear recollection of when they made the phone call. Other people live busy lives and cannot remember so we have to search.[37]

29. Ms Walker explained that:

We have had problems in terms of having to access telephone calls by physically retrieving tapes and replaying tapes. We are now looking at whether we can digitise those recordings so that they are accessible through the computer system. We are actively looking at whether we can make that easier to check.[38]

30. It is deeply worrying that a scheme such as this one has such unsophisticated means for reconstructing individuals' records. It is essential that any public service scheme which involves a history of transactions between individuals and a department should have at its base adequate case-handling capacity, whatever technology it uses.

Reasonableness test

31. The Code of Practice 26 introduces a test of reasonableness to judge whether an overpayment should be recovered. It states that: "We will not ask you to pay back an overpayment if it arose because we made a mistake and you could reasonably have thought your award was right".[39]

32. The Ombudsman notes however that "in practice, and in contradiction of the Code, excess payments during the tax year (and at the end of the tax year) are recovered by the Revenue as a matter of course, without prior investigation of either of these two key questions".[40] The Revenue has effectively a reasonableness test as to whether the claimant should have known he was being overpaid but it is difficult to discover the accuracy of that information.

33. In his evidence Mr Varney seemed clear in his views about this test: "If your income has gone up by more than £10,000, I would have thought for most people it is reasonable that they should have known of that change of circumstance".[41] He also suggested a further test: "As an accounting officer, I have to make a value judgment about what is value for money and what is fair".[42] The Ombudsman proposed in her report the means by which it should be possible to balance value for money and fairness within the scheme. She recommended that consideration should be given to the adoption of a statutory test for the recovery of excess payments and overpayments of tax credits, similar to the test that is currently applied to social security benefits, where a benefit must be repaid if the claimant has misrepresented or failed to disclose a material fact, with a right of appeal to an independent tribunal.[43] Mr Gray confirmed that a review of the reasonableness test was underway:

We are in very active discussions with a whole range of external stakeholders, voluntary sector bodies and so on. We are currently working on seeking to reach conclusions by around the end of the calendar year. In that, we are particularly focusing on whether we can bring rather greater transparency and clarity to the criteria to be used in judging reasonableness.[44]

34. We welcome the Revenue's review of the reasonableness test and support the need for a solution modelled on the well-established social security benefits.

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3   Second Report of the Parliamentary Commissioner for Administration, Session 2003-04: Annual Report 2003-04, HC 702, July 2004, Foreword Back

4   Ibid., p 2 Back

5   HC 50-i, Q 15 Back

6   Third Report of the Parliamentary Commissioner for Administration, Session 2005-06: Tax Credits: Putting Things Right, HC 124, p 5 Back

7   Ibid., p 3 Back

8   Ibid., p 5 Back

9   Q 51 Back

10   HC (2005-06) 124, p 20 Back

11   Ibid., pp 21 et seq. and Appendix C. Back

12   Q 25 Back

13   HM Revenue, Code of Practice 26, pp 8-9 Back

14   HC (2005-06) 124, p 17 Back

15   Ibid., p 58 Back

16   Q 102 [Mr Varney] Back

17   Q 19 Back

18   Q 101 [Ms Walker] Back

19   Q 106 [Mr Gray] Back

20   HC (2005-06) 124, p 41 Back

21   Ibid., p 6 Back

22   Q 13 Back

23   Q 69 Back

24   Q 53 Back

25   Ibid. Back

26   Ibid. Back

27   Q 106 [Mr Gray] Back

28   Q 17 Back

29   HC (2005-06) 124, p 10 Back

30   Q 27  Back

31   Q 25 Back

32   Q 31 Back

33   Q53 Back

34   HC (2005-06) 124, p 57 Back

35   Q 62 Back

36   Q 95 [Mr Gray] Back

37   Q 95 [Mr Varney] Back

38   Q 96 [Ms Walker] Back

39   HM Revenue, Code of Practice 26, p 8 Back

40   HC (2005-06) 124, p 40 Back

41   Q 92 Back

42   Q 88 Back

43   HC (2005-06) 124, p 53 Back

44   Q 90  Back

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Prepared 29 January 2006