Select Committee on Treasury Written Evidence

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 overpayments".

  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 payment—10% 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 rules.

  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

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