Memorandum submitted by the Chartered
Institute of Taxation (Low Incomes Tax Reform Group)
1. The Low Incomes Tax Reform Group (LITRG)
was established in the spring of 1998. We aim to help people on
low incomes to cope with their tax and to campaign for a simpler
and more accessible system of tax and tax-related benefits. We
are sponsored mainly by the Chartered Institute of Taxation and
also by other bodies such as the Nuffield Foundation.
2. We have been involved in consultations
on the tax credit system since its inception and deal with a growing
caseload of individuals with tax credit problems, mainly related
to overpayment recovery. Despite the announcement by the Paymaster
General on 26 May of improvements to the system, which we broadly
welcome, there remain a great many difficulties facing ordinary
claimants in their dealings with the tax credits bureaucracy.
In this memorandum we highlight two.
3. In her statement of 26 May, the Paymaster
General undertook to review the terms of COP26, the code of practice
by which HMRC exercises its statutory discretion on the recovery
of tax credit overpayments. She also undertook to "to remind
claimants to provide up-to-date information to HMRC on in-year
changes in income and circumstances, to reduce the incidence of
4. If HMRC thinks that an overpayment is
likely to arise, they have statutory power to adjust an award
in-year so as to achieve the "right" result by year-end.
Under COP26 in its current form, HMRC does this by means of its
computer automatically clawing back 100% of the expected overpayment.
The claimant in hardship sometimes has the right to ask for additional
payments to bring their award back to a percentage of what it
was before. But this takes time, and not all claimants are necessarily
aware of their right to make such a request. Nor is this a universal
right, even for those in hardship.
5. In particular, claimants whose income
has risen by more than £2,500 in-year cannot get top-up payments.
If a claimant on income of say £5,000 a year, and getting
maximum tax credits, has an in-year increase to £9,000 a
year, any resulting overpayment can be recovered in one hit, without
the option of asking for top-up payments.
6. By contrast, an overpayment not identified
until after the year-end can be deducted over a period at a percentage
of the continuing tax credit payment10% for those on certain
benefits or on maximum tax credits, 100% for those on family element
only, 25% for all other claimants.
7. This shows that it is strongly to the
claimant's disadvantage to report an in-year increase in income
or non-mandatory change of circumstances when the effect is an
immediate 100% clawback of the resulting overpayment.
8. Unless COP26 is reviewed so as to iron
out the differential treatment between in-year and end-of-year
overpayments, people on low incomes should not be encouraged to
act to their own detriment by reporting increases in income in-year,
particularly when there is no legal obligation on them to do so.
9. Meanwhile, where overpayments are disputed,
there is still no sign that recovery can be suspended while the
dispute is resolved. This means that there are still cases coming
to our attention of claimants having to wait for many months before
disputes are finally resolved in their favour, during which time
the disputed overpayment has been continuously clawed back from
their payments, leaving them and their families in poverty.
10. On 26 May, the Paymaster General said
that new streamlined systems had been introduced to decide cases
where the recovery of an overpayment was disputed.
11. No details are available, so far as
we know, of the precise criteria for eligibility for the streamlined
treatment, what it involves, or the exact date of its introduction.
Nevertheless, it seems that the streamlined procedure can be considerably
more generous to those who are eligible for it than the standard
COP26 procedure has been to others. For instance, in January to
April 2005 less than £7 million worth of overpayments were
written off, while in May 2005 alone (the month of the announcement)
overpayments to the value of £30,823,000 were written off.
12. It seems to follow that a claimant choosing
this moment to dispute overpayment recovery could do a lot better
than he would have done at any time before May this year. But
the streamlined procedure is not available to those whose overpayment
disputes have already been settled under the usual, non-streamlined
13. The world of tax credit overpayment
disputants is now divided between those on the one hand who are
eligible for the streamlined procedure and are likely to have
had their overpayment written off, and on the other hand those
who are not so eligible, or who applied before it was introduced.
They are subject to rather more rigorous criteria and probably
far less likely to qualify for write-off.
14. How can such a marked difference in
treatment be justified, in terms of the duty of HMRC to treat
claimants with equal fairness, when so much seems to depend not
on the justice of the case, but the time at which the claimant
happened to lodge their objection?
24 October 2005