Select Committee on Treasury Written Evidence

Memorandum submitted by Citizens Advice

  Citizens Advice has welcomed statements made over the summer by the Paymaster General, the Prime Minister and the Chancellor of the Exchequer which all show determination that the delivery of tax credits needs to improve rapidly. We also recognise that the Revenue is focusing on delivering the necessary changes.

  We are however, concerned that the implementation of these changes is too slow. Changes are urgently needed to ensure that families can have confidence in tax credit income, and are not plunged into poverty by the sudden withdrawal of tax credit payments. In the longer term too tax credits need to provide stability in order to address child poverty. Families need income stability and security of payments to be able to return to work with confidence depending on their tax credit income to help meet childcare and other costs. In particular:

    —  There has been no commitment to place an absolute limit on the amount that can be recovered from families who have been overpaid.

    —  The position regarding writing-off overpayments remains confused, as the onus remains on individual families to challenge the decision to recover, leaving unknown numbers of people repaying overpaid tax credits which have resulted from Revenue errors.

    —  The Government has made much of the commitment to suspect recovery of overpayments where recovery is being disputed on grounds of official error or hardship. This commitment was first made by HMRC Chairman David Varney in January this year and confirmed by the Paymaster General in May and June, but we are yet to have any clear indication of when this might take place.

    —  No commitment has been given to introduce a statutory right of appeal to an independent tribunal.


  One third of all households were overpaid £1.9 billion in 2003-04. Figures show that more than half of these were as a result of income rises over £2,500 and 0.3 million families experienced rises over £10,000 and did not report the change until the year end.[1] There are as yet no figures published giving details of the full extent of the number of overpayments resulting from Revenue errors.

  The rules around writing off overpayments arising from Revenue error are complex and discussions in Parliament have often been misleading. For instance Tony Blair advised the House during Prime Minister's questions on 22 June and again when challenged on 29 June that "we will not seek to get the money back if the error is on the part of the Inland Revenue." It was later confirmed that whilst the Revenue will write off overpayments arising from "official error", the definition of "official error" is two-fold: where the Revenue has made a mistake and where in addition it was "reasonable' for the claimant to believe that their award was correct.

  In addition to this, overpayments are still automatically recovered unless a claimant disputes the recovery. By June 2005 HMRC had received 294,000 requests for the recovery of overpayments to be reconsidered on official error grounds and 116,000 were awaiting decision. The backlog of disputes awaiting decision meant many claimants had to wait many months, during which time recovery continued. In May 2005 "streamlined' processes were introduced for making these decisions, but the criteria for writing-off have not been made public. There was an immediate rise in the numbers of overpayments being written off, from an average £1.2 million per month written off from January to April 2005 to almost £31 million in May 2005.[2] Citizens Advice Bureaux have seen many more overpayments being written off.

  The main commitment on overpayments made by the Paymaster General is that the Revenue will consider suspending recovery during a dispute period. The Revenue Chairman, David Varney, originally promised this in evidence to the Public Accounts Committee in January 2005. At the time the Revenue was unable to stop the computer system from automatically recovering, so regardless of how long it took to investigate the claimant's case, recovery continued. IT systems have made this difficult to achieve and in the short term we understand that achieving this will involve "tricking" the computer. Work has been carried out on this over the summer period but we are now waiting for Ministers to announce when they intend to proceed on this. Six months into the financial year the suspension will be too late to be of significant value for most families.

Key questions

    —  When is the suspension of disputed recoveries likely to be introduced?

    —  What about overpayments that are not disputed, but would meet the official error test?

    —  The Revenue must provide all claimants with information about overpayments and the reasons why they have arisen. Claimants must be informed clearly about their right to dispute recovery on official error grounds.

    —  Use of the "reasonableness" test must take into account the inadequate information and advice available to claimants on the helpline or on their award notices to enable them to understand their awards.


  Citizens Advice has recommended an absolute limit to recovery from ongoing tax credit payments. This important proposal has not been addressed in recent Government statements. Citizens Advice believes an absolute limit on recovery from those most in need of tax credits is crucial, if vital objectives on tackling child poverty, helping people into work and to keep jobs are to be achieved in full.

  Unless safeguards are built-in, an annual system cannot protect weekly income. Even if the quality of administration significantly improves, households could still find themselves with their weekly payments dramatically cut, particularly if an overpayment comes to light near the end of a financial year. One example illustrates this:

    On finishing work and claiming income support, a lone parent had accrued an overpayment of £185. Although this was small, because there were only six weeks left of the tax year, her payments were cut from around £40 a week to just £9 a week and she was facing significant hardship.

  Tax credits are designed to be responsive to families' changes in circumstances. They contrast with the old fixed period systems that were stable but meant that families had to wait until the end of their award period for payments to change to reflect any new circumstances. Although fixed awards were not responsive to drops in income, to many families the stability they bought was very welcome.

  The advantages of an annual system do not take away the need for minimum weekly incomes. Adjustments to tax credits within the tax year have left families unable to pay childcare costs, their rent or their mortgage payments and those on benefit, struggling to live on just the adult rate of income support of £56.20. In contrast, the recovery of an overpayment of benefit would never remove payments altogether. With the transfer of 0.8 million benefit claimants, to child tax credit next year, the need to protect weekly incomes is even more urgent. We accept that adjustments are part of an annual system but there must be limits to ensure families are not left in hardship.

  The most common report from Citizens Advice Bureaux dealing with clients with overpayments is that it is simply not clear how the overpayment has arisen or in fact, how much it is. Whilst the Revenue inform claimants that they have been overpaid, by how much and how it will be recovered, they have no standard means of informing them of the cause of the overpayment.

  One CAB reported that their client first came to see them in June 2004. They finally closed her case 13 months later—in July 2005. "She had so many award notices we could have decorated the bureau." There had been numerous mistakes including missing children, wages and an extra disability. Initially the claimants had been told that although the overpayment was caused by Revenue error they should have been able to spot it, so it would be recovered. All replies to their challenges simply repeated this, including one from the Paymaster General, but a year later out of the blue client got a letter remitting it in full.

  The Government has committed to review the Code of Practice on the Recovery of Overpayments. In August Citizens Advice participated in a consultation meeting where there was a broad consensus on changes that need to be made. The key recommendations were:

    —  All cuts to payments resulting from overpayments during the year or at the year-end must be limited to ensure families are not left in hardship. For example, households on maximum child tax credit should not have their payments cut by more than 10% of their weekly entitlement. (See paragraphs 6.42-6.58 of CAB report, Money with your name on it).

    —  There must be an end to immediate automatic recovery/adjustments in payments. They should be delayed for 30 days after the claimant has been notified of the reason for the overpayment; of their right to dispute the recovery on the grounds of official error or hardship; and/or their right to appeal entitlement and of course information about how and when the adjustment/recovery will start.

    —  The introduction of a statutory right of appeal to an independent appeals tribunal.


  The Paymaster General's statement of 26 May 2005 highlighted the need to improve the quality of award notices, of service provided by the helpline and improve the speed with which they can identify IT problems and errors. We welcome the reviews that are being undertaken as part of this but are concerned that it will be many months and in some cases years before improvements are felt on the ground by claimants.We welcomed the opportunity to contribute to the redesign of the award notices and hope the changes will help claimants to understand their entitlement. We are disappointed however that the changes will not be introduced until April 2006.

  CAB advisers face considerable difficulty resolving even the most simple errors and other problems with their clients' tax credits. They report tax credits as their number one policy concern even though they receive more enquiries about other issues. This is because cases can be extremely complex, time consuming to resolve and the problems facing the clients in the interim are often very serious indeed.

  Complaints about the quality of administration can take a long time to pursue and claimants will often not get the redress they deserve. The Adjudicator's report published in June highlighted that complaints about tax credits rose from one third of all their complaints received in 2003-04 to a half in 2004-05 and they upheld over 80% of in favour of the complainant either fully or in part. Similarly, since the introduction of new tax credits, the Parliamentary Ombudsman upheld 79% of their tax credit complaints in whole or in part.

  The Paymaster General's statement also places considerable emphasis on educating claimants to understand the importance of reporting changes in their circumstances. Much of our evidence however, shows that many people have reported changes to the helpline, but that these have failed to be acted on by the Revenue. HMRC still have a lot to do to rebuild confidence in their administration.Whilst we accept that the computer system is now more stable than in the initial periods of 2003-04, we find current statements that indicate that there are no systematic problems with the system, only individual problems, misleading. We understand that there is still a problem with the payments system which can result in the payment of lump sums into claimants' bank accounts in error.

Key points

    —  The planned improvements are very welcome but we would like to stress the urgency of this and in additional to urge for the contingency arrangements to be put in place. Claimants who cannot be paid because their cases are "stuck" should be offered interim payments and those paid in error should not be advised without further checking that the payment is theirs to keep.

    —  Until award notices can be improved, it is essential that the tax credit helpline must be better able to explain award notices to claimants. They must also be able to explain the reasons for overpayments and clarify what payments are due and why.

    —  Urgent improvements to the response times for correspondence are essential.

    —  In order to improve transparency and accountability, we would welcome further publication of performance information and information on complaints, correspondence response times, appeal clearance times, and numbers of award adjustments that leave families on incomes below their weekly or monthly entitlement.

    —  We also believe that for some there will always be a need for face-to-face advice, particularly when trying to understand complex paperwork and even when trying to establish relevant income.

October 2005

1   HC Deb, 12 September, col 2387w Back

2   HC Deb, 4 July 2005, col 101w Back

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