SUBSTANCE OF THE REASONABLENESS TEST
62. In her report to the House on tax credits, the Ombudsman also
recommended that the reasonableness test be replaced with a statutory
test "consistent with the test that is currently applied
to social security benefits … In general, an overpayment
of a social security benefit must be repaid [only] if the claimant
has misrepresented or failed to disclose a material fact."[98]
The basis for her recommendation was as follows:
… I am not convinced that the current test properly reflects
the weight of obligation there should be on the Revenue to give
prompt, accurate and reliable awards to its customers … I
am conscious of the fact that, within the benefits system, a statutory
test for the recovery of overpayments has been applied for many
years. In general, an overpayment of a social security benefit
must be repaid if the claimant has misrepresented or failed to
disclose a material fact … Tax credits resemble benefits,
in that they are income-related cash payments paid by a government
department, intended to help people on modest incomes with their
daily living expenses. Indeed, they have replaced previous benefits
paid for the same purpose. This test seems to strike the right
balance between the obligations on the part of the administrators
and those on the part of the recipients.[99]
63. In October 2005, Sir David told us that Government was still
considering whether to accept the Ombudsman's recommendation.[100]
We sought an update from Sir David on this matter on 19 April.
He indicated that the point was still under consideration, and
said that HMRC officials were "in discussion with ministers
and giving advice on an ongoing basis".[101]
Mr Paul Gray, Deputy Chairman of HMRC, told us that the Department
was considering "a range of issues", including:
… whether or not it is necessary and appropriate to give
that particular form of right to a claimant in order to generate
the right kind of outcomes for them … consistency with other
parts of the tax system and with the benefits system, … the
administrative and cost implications of introducing an appeal
right on disputed overpayments and putting that into the whole
mix … of the pressures and competing priorities on our resources.[102]
In relation to HMRC's timescale for reaching a decision on this
matter, Mr Gray said that the Department has "not fixed a
particular point at which we say we must reach a decision on this"
and that the timescale "is something we are keeping under
review".[103]
64. The Ombudsman's call for the reasonableness test to be replaced
by a test parallel to that applied for recovery of overpaid benefits
did not, on the whole, appear to be taken up by our witnesses
representing the voluntary sector. Citizens Advice acknowledged
that the tax credits regime "is a different system"
from the benefits regime, and made it clear that they would not
argue that claimants "who receive random amounts of, say,
£5,000—which has happened—into their bank accounts
should get to keep it", as that would not be a good use of
resources.[104] CPAG
took a slightly different approach, advocating the abandonment
of the second part of the reasonableness test altogether, until
such time as better award notices were introduced.[105]
CPAG commented that there were "a number of stages we could
be working through on the way, in the long term, to recognising
that of course there will have to be some sort of test that takes
account of what the claimant knew".[106]
Application of the reasonableness test
65. Many of our witnesses argued strongly that the way in which
HMRC applies the reasonableness test is unduly harsh and exacting.
The Ombudsman considered that the HMRC's "internal system
for determining whether sums should be repaid" did not operate
"in a fair and transparent manner".[107]
OPF stated that, based on its current experience, it had "no
confidence whatsoever" in HMRC's ability to apply the test
fairly.[108] OPF suggested
that, in applying the second limb of the test, HMRC used an unduly
high standard of 'reasonableness':
For example, we do not think that anyone independent looking at
the award notices at the moment would say that it was reasonable
for you to have believed your award was correct, because you just
would not know; but when the Revenue looks at it, they think,
"You should have read that."[109]
66. A similar point was made by the Low Income Tax Reform Group
(LITRG)), which considered that "the problem with the way
in which the reasonableness test has been applied … is that
it is a very objective reasonableness test and it is a very high
standard of understanding that is imposed upon people.[110]
LITRG believed that HMRC should be taking into account the capability
of individual claimants: "for example … a lot of their
claimants maybe have a reading age of 11, say, and … it is
simply not reasonable for them to be able to understand a lot
of this stuff".[111]
A representative from Citizens Advice argued that "a reasonableness
test for myself would be totally different from a reasonableness
test for possibly one of my physically or mentally disabled clients—more
often the mentally disabled".[112]
67. Representatives from the voluntary sector pointed
to examples of cases in which HMRC appeared to have applied the
reasonableness test unfairly. Citizens Advice Northern Ireland
referred to a case in which a particular computer error, known
as the 'Red A' computer error, which occurred in June 2004, caused
the miscalculation of hundreds of thousands of award notices:
… Having fought many of those cases for clients
who disputed the overpayment and the recovery of it, every single
case was dealt with differently. Although they were caused by
exactly the same computer error at exactly the same time and the
reason for the overpayment was the same … every case was
dealt with differently. Some were remitted fully at stage one
of the process, others had gone all the way up to the Adjudicator
because they had gone through every stage of the four stages of
the Inland Revenue decision saying, "No, it is fully recoverable.
It was not reasonable for you to think your award was correct"."[113]
68. Advice NI told us that it had written to HMRC
in January or February 2005, making a request under the Freedom
of Information Act 2001 relating to "the issue of people
disputing recovery and the outcomes of that":
… over 3,600 claimants had looked to have their
overpayment looked at again and, as a result of that, 39 cases
were remitted in terms of Child Tax Credit and 15 were remitted
in terms of Working Tax Credit. A total of 50 cases were remitted
out of 3,600 who applied … [114]
69. We took up the issue of the way in which HMRC
applies the reasonableness test in the course of our visit to
the TCO in Preston, on 13 March. We requested a written note from
the TCO on the processes it has in place to ensure that the test
is applied consistently by all the 1,000 or so staff working on
disputed overpayments. More than two months later, and shortly
before agreeing this report, we received a response from HMRC
to our request. The Department said that the "vast majority"
of overpayments made were "properly recoverable".[115]
Beyond the criteria set out in COP 26, the Department appears
to have no further written guidance in place for staff considering
disputed overpayments. If the claimant has checked all the details
listed in COP 26, "HMRC would normally agree that the claimant
could have reasonably assumed their payments were right".[116]
Our conclusions
70. We
recommend that, as a minimum, HMRC ensure it has written guidelines
in place to assist staff in determining whether it was reasonable
for a particular claimant to have thought his or her payments
were right, in all the circumstances. The reasonableness test
cannot be applied as a stringent objective test, but must take
account of a claimant's circumstances, the clarity of the award
notices issued to him or her and, where appropriate, any limitations
on the claimant's capacity to understand an award notice. No doubt
these requirements could place a heavy investigative burden on
HMRC in certain cases. However, it seems to us that this is the
price HMRC must pay if it is to continue applying a reasonableness
test, rather than a test along the lines of the social security
test, where overpayment of a benefit can be recovered only where
the claimant has misrepresented or failed to disclose a material
fact.
Calls for an independent right
of appeal
71. Claimants may appeal to an independent tribunal
a decision by HMRC about the amount of tax credit to which
they are entitled. Claimants do not have a comparable right to
appeal a decision by HMRC to recover an overpayment, once the
claimant has disputed it—in other words, to appeal the way
in which HMRC has applied the reasonableness test. The claimant's
position is set out in COP 26, the relevant sections of which
are given below:[117]Extracts
from COP 26, What happens if we have paid you too much tax credit?
