Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 167-179)


26 OCTOBER 2005

  Q167 Chairman: Minister, can I welcome you back to the Sub-Committee. Could you introduce yourself and your colleagues formally for our shorthand writer?

  Dawn Primarolo: Good afternoon, Mr Fallon. My name is Dawn Primarolo and I am the Paymaster General. On my right hand side is Mike Hanson, who is Head of Corporate Services and on my left hand side is Miss Walker, who is Director of Benefits and Credits.

  Q168  Chairman: Thank you very much. Can I start by asking you—

  Dawn Primarolo: I am sorry, Chairman, I wanted to make an opening statement to the Committee and I was told that would be all right, so perhaps I can do that briefly, because I know we are anxious to get straight to the questions. Can I thank you for the opportunity of making this brief opening statement to the Committee today. HMRC Spring Report is in essence a statement of what the Department plans to achieve. It is early days in the merger. The aim of the merger is to achieve three strategic outcomes. Firstly, improved taxpayers' services. Early signs are encouraging. For example, the number of leaflets issued by the Department has been cut by 50% and the clarity of those still being issued is to be improved. One million people have been taken out of the self-assessment net altogether and 1½ million now have a simplified form. On efficiency, we have set the Department challenging efficiency targets and we expect them to be achieved. Again, the story so far is encouraging. About 2,500 posts have been cut; almost exactly where the Department should be at this stage to meet its 2008 targets. But this work is not simply about efficiencies, we also need to see productivity and quality gains across the Department. Thirdly, revenue yield. Revenue and Customs is aiming to collect a higher proportion of revenue than ever before and is clearly focused on closing the tax gaps on oils, tobacco, VAT and alcohol. Progress on these strategies will be reported at the time of the PBR as usual. Turning to tax credits, which I know the Committee is extremely interested in: HMRC has started the completion of the renewals process for 2004-05. That still has three months to run, until the end of January for the last applications, but early indications are that it is progressing well. More forms have been returned than last year and the helpline has dealt effectively with the increased volume of enquiries around the renewals deadline. Latest figures show that more families than ever—6.1 million—are benefiting from tax credits, with the majority of people receiving the right amount of money at the right time. But, of course, as the Committee will know from my statement of 26 May and subsequent reports published, I have set out to make sure that the Department improves measures for the administration of tax credits in three specific areas: improve how the Department communicates with families about their tax credit awards; reduce the risk of errors adding to overpayments; and improve the procedures for recovering overpayments. On improving communications, since May, HMRC has been reviewing the information it provides to claimants in written communications through its helplines and online. A new award notice, which reflects comments from the voluntary and community sector, has been agreed and will be issued from April 2006. For claimants this means they will receive a much clearer summary of their award, with an explanation of how it has been calculated and what they will be paid. Following consultation with the voluntary and community sector, the tax credits section of HMRC has redesigned the website to improve claimants' ability to access forms and information and give answers to their most frequently asked questions. HMRC will also be reducing the size of guidance notes sent out to claimants. From April next year, claimants will receive a two-page summary that explains the most important aspects of their award and tells them what information on their award needs to be checked. In 2006, a new renewal notice will be introduced so that when a claimant receives their renewals pack, they will receive a comprehensive "play-back" statement of the Department's records of their income and circumstances for the previous year. One of the most frequently made points by the voluntary sector, Hon Members and claimants is the need for a clearer message to remind claimants of the importance of providing up-to-date and clear information on any change of circumstances. A publicity campaign will run from the New Year to remind claimants to notify HMRC promptly of any changes in their circumstances. In addition, the Department is piloting more targeted approaches to remind claimants to report changes. Following the problems experienced during the introductory period of tax credits over two years ago, the performance of the helpline has been significantly improved and figures for the year to date show that 97% of calls are being answered within the target. HMRC is seeking to improve the quality of the helpline service through improved guidance, training for staff, learning from feed-back, but most importantly arranging for call-back arrangements using a case-work approach to provide more targeted support to the most complicated cases. They are also taking forward objectives to create a more flexible IT system that will allow process improvements, such as changes to award notices, to be introduced much more quickly. However, having established the integrity of the IT system and significantly improved its performance, the priority must be to ensure that progress to more flexibility is done in a measured and orderly way. In terms of working with other organisations, HMRC is discussing with the Citizens Advice Bureau how they can best work together with a view to developing pilots to support claimants better, including offering face-to-face contact with the most vulnerable groups. It is also working, in full consultation with the voluntary sector and other interested parties, to speed up improvements in key areas including the quality of the helpline service, the handling of appeals, complaints and the code of practice on overpayments, and the Department is aiming to introduce for further discussion a new version of COP 26, the appeals procedure, by the end of this year. Finally, the Department is able to make additional payments to claimants in cases of genuine hardship. In addition, where an overpayment is being recovered from someone who is no longer receiving tax credits, there are procedures that allow HMRC to agree extended terms for recovery. Where recovery of an overpayment is disputed, in cases where there is no on-going award, there are already arrangements in place to suspend recovery. As I have said in my written Parliamentary Answer this morning, from next month, subject to final testing by HMRC, interim procedures will be put in place so that if a claimant disputes the recovery of an overpayment, action will be taken to prevent automatic recovery until the Tax Credit Office has looked into the case and made a decision. These procedures will apply both to the cases on hand and to new cases going forward. I have asked the Tax Credit Office to aim to complete all such enquiries and make decisions within four weeks. Of course, HMRC will continue to develop work on a fully computerised, automated procedure for suspending the recovery of disputed overpayments with a view to introducing this in 12 months' time , but I believe the interim procedures will give the immediate relief which so many are seeking. Thank you.

  Q169  Chairman: Thank you. It would be helpful if we could have copies of that statement because there is quite a lot of detail in it. I do not know whether you can make them available while this session is in progress. There is clearly quite a lot wrong with a system which requires so many changes to be made, which I am sure we would welcome, and I know my colleagues will want to pursue some of the detail of that. I would like first to ask you about progress on the merger of Revenue and Customs. David Varney, the Chairman, told us on 12 October that the structure was finalised at the top level but not in terms of the new command. Why is the structure still not properly in place six months after you have started?

  Dawn Primarolo: Can I say, firstly, Mr Fallon, the change that the merger will bring about within the Department is absolutely fundamental in terms of changing the way that the Department works and its ethos to put at the centre of its considerations the taxpayer and the services that need to be delivered to ensure both the efficient collection of tax and an efficient service to the taxpayer. In order to drive that through such a large organisation, whilst at the same time—the primary objective—also continuing to collect the revenue currently and maintain the current services, what is necessary in this organisation and in the merger is that at the top of the organisation the structure is designed to drive those changes through the entire organisation over a number of years. So in the discussions that I have had with David Varney, I think it is entirely appropriate to approach it in this way. It is nigh impossible to take organisations of 100,000 and simply try and join them together. As you are probably aware, there are lots of other things which need to be done as well: the question of whether the Taxes Management Act is still the most efficient piece of legislation it should be; there is consultation going on with regard to the powers of the Department; there is consultation going on with the business sector and other taxpayers about what they expect from the merger, and all of that needs to be fed in in order to develop this process. I hope we will begin to see the fruits of that because I am sure we would all agree that the Department should first ask itself what does the taxpayer think about this and how does the taxpayer deal with the requirements we put on them.

  Q170  Chairman: We will come back to that later. Turning to tax credits, I think you said 6 million families were now benefiting as you originally forecast, but David Varney told us in the year ending March 04 some 1.9 million families had been overpaid and he expected the figure, though it is not available yet, to be roughly similar for the year ending March 05. If there are 6 million benefiting and 1.9 million being wrongly paid, do you think that is a satisfactory outcome?

  Dawn Primarolo: I do not think it is a satisfactory outcome, Mr Fallon, if the results of that are because of inefficiencies or errors in the system. I think it is important to understand what the tax credit system does in terms of delivering flexibility to the taxpayer, making sure they get the money they need at the time they get it, and this is a new system. Naturally, I am not satisfied, and nor are Members of Parliament, that because of the initial problems in the tax system there are errors, either by the computer or errors subsequently, which have led to difficulties in some payments. I think it is important to state that the majority of tax credit recipients do get the right amount of money and do get it on time. What is rightly a point to be addressed is how do we make sure that proportion increases and that wherever we can we ensure people get the right amount of money at the right time. If somebody's circumstances change, then the position for the Department is that it has to know about that, but then the Department has to do a number of things which I think we also need to pay some attention to once it has been notified.

  Q171  Chairman: Again, I think we will come back later to the design of the system. Finally from me, I want to ask you whether you recall the Regulatory Impact Assessment and how much you thought the system would cost? Do you recall the assessment you made?

  Dawn Primarolo: I have to be honest and say that is not the immediate thing which is at the top of my mind for today's hearing. I am sure you can tell me.

  Q172  Chairman: I can tell you because you said, "Recurring costs of £300 million a year to administer Child and Working Tax Credit to a population of 6 million", which [you said] is in fact the population. That was £300 million, but from the Spring Departmental accounts we see the cost of administering Working Tax Credit was £133 million and Child Tax Credit was £342 million, a total of £475 million. So this is costing half as much again, 58% more than you forecast.

  Dawn Primarolo: I think if you take another comparison, Chairman, and I do not have the figures right here but I am happy to give them in writing to the Committee, which is the cost per payment under either Working Families Tax Credit or the cost of payment under Family Credit, what the Committee will see is the cost of administering per claim is the same or less. So in terms of volume and in terms of cost for each family, how much it costs the Department is round about the same. I am happy to send these figures and if the Committee wants to come back to me, they certainly can, but I do not have that right in front of me now.[1]

  Q173 Chairman: I understand that, but do you accept were wrong in the assessment you made at the time, that this is now costing half a billion a year instead of £300 million?

  Dawn Primarolo: Indeed, it is ever possible. As you know, Mr Fallon, I make assumptions and forecasts on the best available information which is available to us. Hindsight is wonderful, I often wish I had it. I have quite clearly stated the figures and I am happy to give a more detailed response to you in writing, as I was not prepared for that.

  Q174  Chairman: Why do you think it is costing so much more than you had predicted?

  Dawn Primarolo: I think because there is such a huge number of families in the system, and the take-up of the system has outstripped all of the expectations. It has been a very great success and continues to be, and that is good for the policy but in terms of expectation and running costs in the early years you have rightly pointed out some facts on that.

  Q175  Peter Viggers: May I quote briefly from a letter from a constituent? "Realising errors had been made on our claim due to our up-dates not being recorded and upon receiving conflicting and inconsistent information and advice from the operatives, we failed to return the renewal form in an effort to stop the payments and therefore stop any overpayments accruing. We had completely lost confidence in the system and did not know what else to do. At this moment in time not only are we faced with a huge overpayment claim of £3,454.49, we are not claiming money that is rightfully ours." Do you think that Ministers recognise the depth of distress this system is causing?

  Dawn Primarolo: It is very difficult for me, without notice of an individual case, to comment more particularly on that individual case, so perhaps I could deal with the generalities, Mr Viggers. I have made it clear at every point in the discussions of tax credits, whether it has been statements, adjournment debates, Treasury Question Time or my appearances on the media—quite frequently on this—that for the individuals concerned it is not acceptable that they have not received the service they should have done, and I deeply regret that. So answering your first question, do I appreciate it, I certainly do and I think Parliament as a whole does, and that is witnessed by the fact of the letters, Parliamentary Questions and indeed the number of Members of Parliament who speak to me privately or ask to come and see me in my office. But the next step is what is being done about it. So with regard to the point your constituent has made, the new procedure to suspend recovery whilst that case is being sorted out within a specific period will address that problem. The question for me is until I see the details of the case, I cannot see when that actually occurred, whether it is as a result of the 2003-04 problems or whether there has been something else going on. I want to stress, I have tried to say all the time in the letters that I send to Members of Parliament or directly to members of the public, that of course I deeply regret this and I apologise where the errors have been made, and I think that is quite right. I also take very seriously, hence my statement on 26 May[2] and the way we are taking forward both the comments of the Adjudicator and the Ombudsman, how we specifically deal with those issues and we need to of course.

  Q176 Peter Viggers: May we consider the test upon which it is decided whether or not an overpayment must be repaid. With social security payments, if the claimant can be shown to have "misrepresented or failed to disclose a material fact" there can be a demand for repayment, whereas with a tax credit the test is whether the claimant "reasonably believed the award to be correct". It is a subjective judgment by your Department. Are you satisfied with that test being different from the social security test?

  Dawn Primarolo: Yes, I most certainly am, because I think there are a number of other tests in place. The "misrepresented material fact" is sublimely wrong information, and quite clearly that is dealt with in the tax credit system. In addition, the tax credit system follows the rules in the tax system of a light touch, which is the two-pronged test of error and reasonableness. It is a test which has worked in the tax system for all taxpayers for actually quite a long time. I entirely accept, and we may come on to this as a question, the issue about "reasonable" and what the Ombudsman has said and what I have said in terms of reviews are a matter to be looked at. I would finally say that tax credits are not benefits, tax credits are negative tax and they are in the tax system and they follow tax rules.

  Q177  Peter Viggers: You gave your undertaking five months ago in the House, in May 2005, that in cases of genuine hardship where recovery of an overpayment is disputed, the Department would ensure recovery was suspended while the dispute was resolved, but two weeks ago your officials told us it would be another 12 months before the Department was able to build into the IT system an automatic facility to suspend the recovery of overpayment, right through to October 2006. Why is it taking so long?

  Dawn Primarolo: Firstly, can I say that I have said this afternoon, and I appreciate the point Mr Fallon made about the Committee wanting to see the details of this, that the Department is planning and is currently piloting—as long as there are no show-stoppers about why and we are not aware of any—to suspend all disputed recoveries regardless of the hardship test manually. I have been informed by the Department, and I have to take that advice, that the automation on to the computer is going to take longer, so at this point I have to put two steps in to deliver that outcome. Should the testing and the piloting of this proceed well, I hope this will be introduced round about mid-November.

  Q178  Kerry McCarthy: When your officials gave evidence on 12 October they said in cases of hardship the Department is already able to restore the full amount of entitlement regardless of whether there is a dispute. What advice have you given to your officials or on what policy basis do they make this decision about whether there is a case of genuine hardship?

  Dawn Primarolo: The officials will be expected in the question of hardship to consider the circumstances of the individual taxpayer but there has been considerable discussion around the question of how that is achieved and indeed the Ombudsman has in one of her recommendations raised that. So I have removed the hardship test from suspension, because I think we should proceed on the basis it is disputed and therefore it should be looked at and therefore it should be determined quickly. What I expect from the review that the Department, in consultation with the voluntary sector and the Ombudsman, is doing on what is called COP 26 is that the question of the reasonable belief test lays out a clear statement of the circumstances in which people can claim help under a hardship category, over and above the other help which is available. I think that will move things forward. Of course there are a number of other things which will also need to be taken on board but I think that will be a bit further down the road, which are to do with recommendations from the Ombudsman.

  Q179  Kerry McCarthy: So the discretion to either not recover any overpayment or make additional payments in the case of exceptional hardship will remain regardless of whether it is disputed under present policy?

  Dawn Primarolo: Absolutely, but that tends to come into play in the end-of-year recovery or where there is no on-going tax credit award. What I am trying to do at the moment is take pressure off the system where there are disputed awards and get them settled but, at the same time, require the Department to review and address the points which are being made on hardship and reasonableness, and I am trying my best to respect, as would be expected of me, the recommendations which have been made of me about what the Department should be looking at.

1   Ev 46 Back

2   HC Deb, 26 May 2005, col 23WS Back

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