Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 40-59)


12 OCTOBER 2005

  Q40  Mr McFall: This was on the computer, right? Do not give me apologies, I want solutions.

  Mr Varney: Fine.

  Q41  Chairman: Let us have the answer.

  Mr Varney: If you give us the case, we will work the case. In general terms, we have six million people. It is incorrect to describe in my view the performance of the system in terms of just a small group. There is a group where we have real problems. We recognise that. We are trying to deal with it. That is what the announcement was on 26 May. The best way of dealing with individual cases is to put us in a position where we can look at it, see what the evidence is, and learn from it. We have an agreement with the Paymaster-General which was announced on May 26 and the steps we are taking is to try to learn from the experiences we have had to date to deal with some of these issues. I sign all the letters that go to MPs, so I know what is coming from the constituents. I know what is coming also in terms of the conversation I have had with Paul since he has been freed up to try to move this forward, but there are hundreds of people working hard in HMRC to try to deliver a better outcome and we need to do justice also to their good work—not mine.

  Q42  Mr McFall: It is the management system I am interested in. That is what we are looking at.

  Mr Varney: It is easy to do that.

  Q43  Lorely Burt: I would like to talk about overpayments and the test of reasonableness. In the first year of operation, your system overpaid 33% of claims. I would like to pick up on the comments that my two colleagues have made here. This is not just the odd case; there are hundreds and thousands of people and families who are put in a tremendous amount of stress and worry because of the system and its failure to operate. Anybody who has read the Ombudsman's report will understand the enormity of the problem—and not only the IT problems but a lot of the other overpayment problems that have occurred because of the way the system is calculated which has already been raised. I do not think there is an MP in the whole of the land who has not been inundated with constituents at the end of their tether, worried about overpayment and clawbacks. I know I certainly have been. When they bring their statements into me and ask me to explain them, I am very embarrassed to say that I cannot understand them. How can they understand exactly what these overpayments are and why they are being paid when people have notified you in time and yet they get an overpayment to the end of the year? Is it reasonable, in your view, when they have told you at every stage of their changes in circumstances and yet at the end of the year you are demanding clawback of monies from them, for them to have to make repayment? They have given you all the information clearly and in good faith and yet at the end of the year you are requiring them to pay money back—which they have spent.

  Mr Varney: The system of overpayment was built into the design that Parliament made of the new tax credit position. It was exacerbated by some computer problems but overpayments are a part and feature of the system. In individual cases we look at what the circumstances were: Was there information which was reasonably available to the individual concerned which was incorrect, which if we had known we would have adjusted the payments? We are also working—as we have committed under the announcement of May 26, in the revision of Code of Practice 26 (which is the stance we take when we approach these issues)—to see whether we can be clearer about the test of reasonableness and lay out much more clearly and transparently than we have the Code of Practice and how we use it. That is what we are trying to do. But there is built into the system an expectation that there will be overpayment.

  Q44  Lorely Burt: Where there has been overpayment, how long are you going to give claimants to pay these monies back? Only last week someone came to one of my surgeries: they have only been receiving the credit for a period of two years, but, because of the overpayment, have received a statement saying that they are now not going to receive anything at all for the following three years—for a family with three small children. Do you consider it is reasonable that these types of situation should prevail, where families who have been paid money and have got used to receiving the higher level of income should then all of a sudden have that stopped immediately?

  Mr Varney: I would have to look at the individual situation to give you an individual answer. If I can give you a general answer, it is that in our practice we do get people who come back to us and ask for delayed payments. We have had about 42,500 requests.

  Miss Walker: Time to pay.

  Mr Varney: Time to pay—and we have granted 42,000 of them. So we do respond and there is an ability to pay people additional tax credits if it drives them into hardship. We try to reach agreement over what is a reasonable and sensible way to pay back the overpayment, if it is within their capacity. If it is not within the capacity, then it falls into the hardship cases.

  Mr Gray: We start with the position formally laid down for the rates of repayment, so a certain percentage per year. That is the standard starting point, but anybody who wishes to come to us and say, "That is generating hardship for us," we look at those cases individually and in the great majority of them respond positively to those requests.

  Q45  Lorely Burt: Are you confident that the Revenue is acting lawfully by recovering those repayments without considering the possibility that the money should not be taken in accordance with the Code of Practice. I understand CPAG are considering taking legal action over this. The Ombudsman said in her report that even if it was not lawful, it was maladministration. Would you accept that?

  Mr Gray: No.

  Mr Varney: We are not quite sure whether we are going to be challenged in the courts over the legality of what we are doing but our legal advice is that what we are doing is consistent with the powers that we have. We do not see it as a case of maladministration and I have written to the Ombudsman saying that. Could I correct the information I gave to you: the 42,000 figure I quoted on time to pay was our performance in the first four months of 2004-05. Today we have 164,000 time-to-pay agreements across the whole population of new tax credits.

  Q46  Jim Cousins: How many requests for time to pay have you rejected?

  Mr Varney: I do not have the exact number. I am quite willing to write. For the first half of this year we had 42,500 applications. I have a feeling we have agreed 40,000 and the rest of them are in the system.[2]

  Mr Gray: In the early months of the year, it was certainly an extremely small number. In relation to the 42,000, I think we have rejected eight.

  Q47  Jim Cousins: Eight thousand?

  Mr Gray: No, eight.

  Q48  Lorely Burt: On that time to pay, when residents come to us and they are in that difficult situation, if they appeal and ask for a longer period to pay, can I take it that you will view sympathetically any requests to extend that time to pay?

  Mr Varney: That is our broad approach. We are obviously not out to cause hardship. In the National Audit Office report—and I apologise again for the accounts not reaching the Committee—there is a description of how long it would take to recover £1.3 billion, which all reflects time to pay. I do not want to be hung for the time, but we do try to reach agreement which is satisfactory on both sides. Our aim is to recover the money.

  Q49  Mr Mudie: Are you challenging the Ombudsman on maladministration?

  Mr Varney: Yes.

  Q50  Mr Mudie: You are setting yourself up to say the Ombudsman does not decide maladministration; the department she is investigating decides maladministration.

  Mr Varney: We are in front of the Select Committee for Public Administration. You asked me whether I accepted it. I do not. I accept that she has the right to make these judgments.

  Q51  Mr Mudie: But, elsewhere in the Ombudsman system, whoever has that judgment put against them it is accepted and we all expect it to be accepted. Have you taken that judgment and acted on the judgment as being something you may disagree with but you are going to implement? Or are you still challenging the Ombudsman?

  Mr Varney: We have written back to the Ombudsman.

  Q52  Susan Kramer: I personally was very taken aback when, earlier in the discussion, in response to the Chairman, you basically said that the primary reason for overpayment is because people do not contact you in time to tell you about their change in circumstances. I think you gave us the actual explanation rather later when you said that overpayment is part of the system. That is surely the problem: that it is inherent in the system. It is not because we have people there who are failing to make contact within a reasonable period to tell you of their change in circumstances. Every MP has had letters from constituents who have made such representations and are still trapped. What worries us more than anything else are the many people who never contact us, so they do not get letters back signed by you , who end up getting lost in the system, suffer hardship, do not realise they can appeal the situation and genuinely suffer with all of this. To go to the issue of automatic recovery, as I understand it there were some recommendations—going back to last January possibly—that when there had at least been an attempt to pay, to stop the system automatically clawing back repayments when a dispute was in place over whether or not that repayment was appropriate. As I talk to people on the ground, my constituents are finding—and it might be that some other people's constituents are finding it too—that they are in dispute but the automatic recovery system continues. What kind of practice have you now put in place to deal with automatic recovery when a dispute is pending?

  Mr Varney: In your speech you made two comments, and I will ask Paul to address the question of the disputes. We are talking about two sides of the same coin. The reason the overpayments arise is because we do not know about the change of circumstance. It is not a different explanation. In the design of the system, there was clearly an expectation that the system will not have the information, either because we did not get it from the customers or we did not record it properly. So it is two sides of the same coin.

  Mr Gray: The issue you have raised is whether we have a facility to suspend recovery of the overpayment once the dispute has been started. Earlier in the year, it was indicated that we were looking to see whether we had a viable means of building that facility into our systems. In terms of getting a durable, fully functional capability in our IT system, it will be something like another 12 months before we are able to build an automatic facility to suspend recovery once an overpayment is in dispute. Over the summer we have been actively looking at whether we are going to be in a position quite shortly to introduce an interim facility that will allow that suspension. We are actively addressing whether we can do that in a safe, reliable way that does introduce an improvement for customers.

  Q53  Susan Kramer: This is the precise area around which the legality of recovery was raised. You have said now that you believe that is legal. Are you able to make available to us the legal advice that provides and supports that position?

  Mr Gray: The facility I am talking about in relation to suspension is the capability for us to suspend an overpayment once it is in dispute. I was not talking about a facility under which, before we instituted overpayment procedures, we would have a suspension.

  Q54  Susan Kramer: Do you believe it is legal for you to be in a position of automatic recovery while the case is in dispute?

  Mr Gray: Yes, we do.

  Q55  Susan Kramer: Can we have the legal advice that supports that?

  Miss Walker: The Paymaster-General wrote a letter to David Laws MP in the summer setting out the reasons why we were confident that this was legal. That letter, I think, has been placed in the House library.

  Q56  Chairman: Could we have a note of this after this session.

  Mr Gray: Yes.[3]

  Q57 Susan Kramer: That would be helpful. I will not pass on David Laws' comments on what he was able to take away from the letter.

  Mr Varney: Thank you!

  Q58  Susan Kramer: Looking again at the issue of recovery in the accounts there is a provision of £961 million of doubtful debts in respect of tax credit overpayments. I understand from what you said earlier that a very large amount of that is very small amounts that were written off because it was not cost-effective to go out and seek recovery. That might lead one to assume that those who are the better-off tax credit claimants get the their amounts written off because they are, by definition, smaller, and those who are in greatest need face the issue of first automatic recovery and then dabbling this whole way through this system. Could you clarify what percentage of your doubtful debts applied to those individuals you have put in the category of being in greatest need?

  Mr Gray: I do not think we can.

  Q59  Susan Kramer: How much is automatically written off?

  Mr Gray: I do not think we can do that for the reasons David was explaining to Mr Todd earlier. That figure of £960 million you talked about was provisions for two years—it is equivalent to the £480 million per year we discussed with Mr Todd—and the basis for making that provision is on some fairly broadly based assumptions about the maximum liability we might face in certain circumstances. It has not, I believe, been based on a detailed bottom-up assessment that says this is how much we think we might need to write off for people in particular family circumstances of the sort you describe.

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