Select Committee on Treasury Written Evidence

Memorandum submitted by One Parent Families


  1.  One Parent Families is the leading charity representing lone parents and their children in Britain today. Tax credits now provide one of the main sources of financial support to lone parents. As at April 2005 there were 2.1 million single adults with children claiming tax credits.[3] We have a longstanding interest in the tax credits scheme and welcomed its introduction—it promised both a significant increase in the level of support to low-income families and a seamless system of support whether in or out of paid work. However, there have since been substantial concerns about the delivery and administration of tax credits, and we believe that the operation of the system as it currently stands is in danger of frustrating the original aims of tax credits to tackle poverty and make work pay. Recent research by the Department for Work and Pensions suggested that "perceived inefficiency in the tax credits system acted as a disincentive for some in generating extra income through work."[4]

  2.   This memorandum discusses problems with the operation of the tax credit system, and the response to these problems from Her Majesty's Revenue and Customs (HMRC).



  3.  Problems with overpayments have been well reported. Official figures published in January showed that some 1.8 million or 33% of claimants had been overpaid during the first year of the scheme's operation.

  4.  It is important to note that overpayments are an inevitable part of the current system, which reconciles an assessment of income based on the previous year with actual income received by the end of the year. The Treasury predicted that around 1 million tax credits awards would need to be reassessed at the end of the first year of tax credits.[5] However, actual overpayments were clearly considerably higher than this prediction. The Australian system of tax credits experienced similar problems with overpayments in its first year of operation, with 39% of claimants overpaid. Despite improvements in the second year of the system's operation, 33% or claimants still incurred an overpayment.[6]

Official Error and Poor Administration

  5.  We do not know how many overpayments have been caused by errors on the part of the Revenue, but we do know that there have been major administrative problems with the scheme. One major software error alone caused 455,000 households to be overpaid[7] and large numbers of claimants have disputed the recovery of an overpayment. Between January and June 2005 alone, HMRC received 163,000 such disputes.[8] Moreover, the Public Accounts Committee indicated that the Revenue are still failing to meet their targets for the accurate processing and calculation of tax credits.[9] While claimants can dispute the recovery of an overpayment on the grounds of official error, for repayment to be waived the Revenue must decide that the claimant "reasonably" believed their award to be correct. The lack of an independent right of appeal against the decision to recover an overpayment means that many claimants lack faith in the Revenue's willingness to make a decision in their favour in such cases. This is out of step with other Government-run schemes. For example, key social security benefits can only be recovered if the claimant can be shown to have "misrepresented or failed to disclose a material fact". There is a right of appeal against any such decision.

  6.  Difficulties with administering the scheme have helped to contribute to the large scale of overpayments, and have caused problems for claimants more generally. The Ombudsman's report suggested that: "the system appears unable to provide an immediate, responsive and appropriate service, particularly when things go wrong"[10] and the Public Accounts Committee have commented that "Schemes that are intrinsically complex carry the risk of being too difficult for the intended beneficiaries to understand and for departments to handle."[11] Recent cases from One Parent Families' advice line indicate continuing administrative problems:

    A caller rang who had twice informed the Revenue by phone that she was no longer using childcare. However she had received a subsequent award notice that included childcare costs.

    A caller rang who was paying back an overpayment of tax credits that accrued because the Revenue had paid her for two children when she had, and had told them that she had, only one. She was now in debt and struggling to pay back a loan and credit cards.

    A caller rang who had returned to Income Support following temporary work. Her tax credits had been substantially reduced following an alleged overpayment. She did not see how this could have occurred as she had kept the Revenue informed about all relevant changes in income and circumstance.

    A caller rang who had been told she had been overpaid tax credits. She had started work in the previous tax year and her New Deal for Lone Parents adviser had filled in the tax credit forms for her. The Revenue were now saying that she had been overpaid childcare costs and Child Tax Credit (it was unclear why) and were reducing her ongoing tax credits to a level which meant that she was not even going to be able to afford her childcare costs.

Recovery of overpayments

  7.  As the cases above indicate, it is the recovery of overpaid tax credits that causes the most significant problems for claimants. Official overpayment statistics do not include adjustments of tax credits within the year, but it is these "in year adjustments" which appear to cause the most difficulties for claimants. If it is discovered that too much has been paid in tax credits at the year-end then it is technically classed as an overpayment, and there are limits placed on the amount by which an ongoing award of tax credits can be reduced to recover this. The limits are as follows:

    —  10% for families on lowest incomes receiving a maximum award;

    —  100% for families on the highest incomes—those receiving only the family element of Child Tax Credit; and

    —  25% for everyone else.

  8.  However, if someone is overpaid during the year, the Revenue treats this not as an overpayment but as an "in-year adjustment". The computer adjusts the payment in order to pay out the right amount of tax credits for the entire year—without taking into account the individual's circumstances. There are no limits on the amount by which an award can be reduced in this way to recover overpaid tax credits within the year. The lack of a protected minimum income level for tax credit claimants during the year is causing considerable hardship. One Parent Families' own research[12] found that lone parents who were having an overpayment recovered were experiencing significant financial difficulties. The most common of such difficulties includes not being able to pay utility bills, and general problems with day-to-day living expenses. Other lone parents had to give up work or to borrow money, and had to miss out on essentials for their children such as new clothes or shoes. When tax credits were proposed, we were assured they would deliver a secure and stable income whether in or out of paid work. No mention was made of these "in-year" recoveries. These appear to have evolved as part of the development of the IT system. A serious question remains about whether such in-year recoveries should be made at all or indeed if they are lawful without first providing the claimant with proper notification and a right of appeal.


  9.   HMRC have acknowledged that there are problems with the scheme, although it is unclear whether they have grasped the full scale of these. The Paymaster General issued a six-point plan on the 26 May setting out the steps the Revenue intends to take to improve the system.[13] We look at each of these points in turn.

  PMG Action point 1: "Building on the work already undertaken to improve the clarity of the tax credit award notice and in consultation with the voluntary sector, HMRC will improve the effectiveness of communication provided to claimants to support them in understanding the responsive nature of the tax credit system and the risk of overpayments. In particular the Department will develop solutions to reduce the number of cases where people receive unnecessary duplication of award notices."

  10.  We welcome the commitment to improve the information provided to claimants, and have been working with the Department on the re-design of tax credit award notices.

  11.  We think that further communication with claimants is necessary when an overpayment occurs, and support the Ombudsman's recommendation eight that:

    Customers who have been paid too much in tax credits, whether identified during the year or at year end, should be sent a letter outlining:

    —  the total amount they owe;

    —  the reasons why the overpayment or excess payment in year occurred and the date or dates when it happened; and

    —  the repayment arrangements which will apply in their case.

    The letter should enclose a copy of COP 26 (the code of practice on overpayments) and draw particular attention to the circumstances when recovery can be waived and the availability of additional tax credits in cases of hardship.[14]

  PMG Action Point 2: "HMRC will test out new methods of reminding tax credit claimants of the importance of providing up to date information in year on changes in their income and circumstances. The Department will consider options to identify families most at risk of an over-payment and support them through better-targeted contacts to ensure that their stated circumstances and income are up to date."

  12.  No analysis of the causes of overpayments has as yet been undertaken—we are very interested to learn whether this is work the Department has in hand. In the absence of such analysis it is unclear the extent to which overpayments have been caused by a lack of claimant understanding. One Parent Families' own research into lone parents' experience of the new tax credit system found that levels of understanding were in fact quite high, with the majority of respondents to the research knowing which changes of circumstance to report to the Revenue.[15]

  13.  Moreover, the suggestion that overpayments are mainly caused by a lack of awareness on the part of claimants ignores the fact that overpayments are a fundamental part of an annual system, and in some cases may be unavoidable, even if claimants report a change when it occurs. Appendix A gives an example of a case in which an overpayment is unavoidable. While better claimant information and understanding should help to reduce the risk of overpayments occurring at the year-end, without analysis of the causes of overpayments we cannot know the extent to which improvements in this area will reduce the problems associated with overpayments and their recovery.

  PMG Action Point 3: "HMRC will develop options to improve the quality of service on the helpline, in particular to ensure that helpline operators can track the progress of individual cases in the system, reducing the need for families to contact the helpline on multiple occasions."

  14. We very much welcome moves to improve the quality of service on the helpline. Particularly important in this area will be improving accuracy in processing changes of circumstance, and ensuring that information provided to claimants via the helpline is accurate.

  PMG Action Point 4: "HMRC will improve the speed with which it identifies IT system problems and processing errors so that they can be resolved more quickly."

  15.  Again, improvements in the IT are much needed. We would hope that attention will be paid to not only identifying IT system problems, but to preventing them from occurring in the first place.

  16.  We remain concerned about the capacity of a wholly IT based system such as tax credits to deliver an adequate service to claimants. Two years into the system's operation we are still hearing of claimants experiencing problems linked to IT failures.

  PMG Action Point 5: "Tax Credits are working well for millions of families but the system is new and requires active engagement from claimants. The role of the voluntary sector is crucial I have asked HMRC to develop innovative ways of working with the sector to target more active support on vulnerable families."

  17.   We welcome moves to increase the support available for vulnerable families. However, we think that the experience of tax credits to date raises questions about whether the current system will be able to fully support the needs of the most vulnerable. This will be even more important if, as planned, the migration of families on Income Support and Jobseekers Allowance proceeds in 2006. Families on low incomes, particularly lone parent families, are likely to experience several changes in their circumstances during a year. One Parent Families' own research found that 47% of respondents had experienced between two and seven changes of circumstance in a year, 36% had only one change, and only 17% had none.[16] The adjustments caused by such changes inevitably lead to some instability of income. We think that further attention should be paid to this issue as raised in the Ombudsman's report:

    " . . . a degree of financial uncertainty is built into the tax credits system by virtue of its design. Excess payments will continue to arise in year, which will need to be recovered by reducing payments for the remainder of the year. The system appears, therefore, to assume a `savings buffer', which will enable people to survive sometimes significant and unexpected fluctuations in their income. But this is not a reality for a significant number of families within this client group . . . this raises the fundamental question as to whether, for people on modest incomes who have to budget and plan their finances carefully to manage their lives, such inbuilt instability or uncertainty really works."[17]

  PMG Action Point 6: "HMRC will review the operation of the code of practice on over-payments. Meeting the commitment made by HMRC's chairman to the Public Accounts Committee in January 2005, the Department will ensure that in cases of genuine hardship where the recovery of an overpayment is disputed, recovery can be suspended while the dispute is resolved."

  18.  We believe that this action point has the greatest potential to improve the experience of the tax credit system for claimants. There is strong consensus within the voluntary sector about the necessary changes to the code of practice, namely:

  19.  "In year adjustments" should be treated the same way as "end of year overpayments". This would mean that, on the current rates, an award could not be reduced by more than:

    —  10% for families on the lowest incomes receiving a maximum award;

    —  100% for families on the highest incomes—those receiving only the family element of Child Tax Credit; and

    —  25% for everyone else.

  This would reduce the considerable hardship that is currently caused by automatic adjustment of an award to pay out the right amount in year, regardless of the claimant's circumstances. This would also make the system easier to understand for claimants, and we hope, to administer for the Revenue. We believe that these limits should be absolute. If an additional overpayment arises, either within the year or at the year-end, recovery rates should not be compounded.

  20.  Recovery of an overpayment should be delayed for 30 days, rather than the current situation where recovery is automatic. Claimants would receive a letter at the beginning of this period, as outlined above, and alerting them to their right to dispute the recovery of an overpayment.

  21.  We accept that the Revenue will want to retain a "reasonableness test" when determining whether to recover an overpayment that was caused by official error. However experience to date means that neither we, nor claimants, have any faith in the Revenue's ability to apply this test fairly. For this reason we think that it is essential that an independent right to appeal any decision to recover an overpayment should be introduced.

  22.  We welcomed the announcement in January that the Revenue would suspend recovery of an overpayment in cases where the overpayment was disputed. It is unclear why processes to enable this have not yet been put in place, eight months after the commitment was made. We understand that the Revenue may have the ability to pay top up payments to claimants that would have the effect of bringing an award up to its original level (and therefore in effect suspending recovery). We would be very interested to know when the Revenue intends to deliver on the commitment made in January.


  One Parent Families welcome the additional financial support that has been provided to families through the Child and Working Tax Credits. However, we remain concerned that problems with delivering the tax credit scheme are resulting in hardship for lone parents and other claimants.

  We were pleased to see the Paymaster General acknowledge some of the problems with the system in her statement of the 26 May. However we remain concerned that the scale of the problem is not yet recognised by HMRC. Instead, failures are being attributed to a lack of claimant understanding, rather than to problems with the system's design and delivery. One Parent Families has prepared a briefing which outlines our ideas for reform of tax credits and which we can provide if the Committee would like to see it. In the meantime, here are some interim changes we believe should be implemented in addition to the steps set out by the Paymaster General. In our view, HMRC must:

    1.  Implement recommendation eight of the Ombudsman's report, ie that claimants who have been overpaid should receive a letter setting out the reasons for the overpayment and how to challenge it.

    2.  Conduct and publish an analysis of the causes of overpayments.

    3.  Improve the quality of advice given on the helpline, and the accuracy of processing information.

    4.  Work to ensure that IT problems do not occur—and consider whether the current model for the delivery of tax credits is the most appropriate one.

    5.  Conduct analysis into the needs of low-income families around stability of income and their preference for responsive or fixed awards.

    6.  Reform Code of Practice 26 so as to place limits on the amount of tax credits that can be recovered from a claimant within the year.

    7.  Wait for 30 days before starting to recover any overpaid tax credits.

    8.  Introduce an independent right of appeal of the decision to recover an overpayment.

    9.  Implement swiftly the commitment made by the Revenue's chairman in January that recovery of overpayments would be suspended in cases where the overpayment is disputed.

3   HM Revenue and Customs Analysis Team (2005) Child and Working Tax Credits April 2005 National Statistics. Back

4   Graham J, Tennant R, Huxley M and O'Connor W (2005) The role of work in low income qualitative families with children-a longitudinal qualitative study DWP Research Report No 245. Back

5   HMT (2002) The Child and Working Tax Credits: The Modernisation of Britain's Tax and Benefit System Number 10 HMT. Back

6   Whiteford P, Mendelson M and Millar J (2003) Timing it right? Tax credits and how to respond to income changes JRF. Back

7   Inland Revenue (2004) Annual Report and Accounts For the Year Ending 31 March 2004 Inland Revenue. Back

8   Hansard 12 September 2005, Col 2385 W. Back

9   House of Commons Committee of Public Accounts (2005) Inland Revenue: Tax Credits and deleted tax cases Fifth Report of Session 2005-06 The Stationery Office. Back

10   Parliamentary and Health Service Ombudsman (2005) Tax Credits: Putting Things Right The Stationery Office. Back

11   House of Commons Committee of Public Accounts (2005) Inland Revenue: Tax Credits and deleted tax cases Fifth Report of Session 2005-06 The Stationery Office. Back

12   Griggs J, McAllister F and Walker R (2005) The new tax credits system: knowledge and awareness among recipients One Parent Families. Back

13   HC Deb, 26 May 2005, col 23ws Back

14   Parliamentary and Health Service Ombudsman (2005) Tax Credits: Putting Things Right The Stationery Office. Back

15   Griggs J, McAllister F and Walker R (2005) The new tax credits system: knowledge and awareness among recipients One Parent Families. Back

16   Griggs J, McAllister F and Walker R (2005) The new tax credits system: knowledge and awareness among recipients One Parent Families. Back

17   Parliamentary and Health Service Ombudsman (2005) Tax Credits: Putting Things Right The Stationery Office. Back

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