Memorandum submitted by One Parent Families
INTRODUCTION
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).
PROBLEMS WITH
THE SYSTEM
AT PRESENT
Overpayments
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
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.
HMRC RESPONSE
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
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.
SUMMARY AND
CONCLUSION
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
| 
