Memorandum submitted by the Chartered
Institute of Taxation
EXECUTIVE SUMMARY
A. We welcome most of the changes made to
the tax credit system announced in the Pre-Budget Report on 5
December 2005. We think that these:
— will go a long way towards removing
overpayments (inherent in a system which is not based on fixed
awards);
— will prevent, for many, the unsatisfactory
position which exists at present, that claimants can find themselves
in an overpayment situation, through no fault of their own, when
their income rises.
B. However, we urge HMRC to abolish the
100% in-year recovery rule sooner than November 2006. With the
new disregard of £25,000 not coming in until 2006-07, there
will be many claimants who will still suffer if their income rises
between now and April 2006. Alternatively the £25,000 disregard
could be introduced one year earlier.
C. We think that some progress is being
made with the six measures announced in the Paymaster General's
statement to the House on 26 May 2005, but the Institute is not
party to all the activity that is going on in this area. We express
some concerns about changes that are being made and make suggestions
for further improvements.
D. We make some other suggestions to help
improve the current administration of tax credits.
E. We express concerns about the proposal
in the PBR to increase the number of situations where claimants
will be liable to a penalty for failure to notify a change of
circumstances. Those whose personal and working lives are less
stable are the ones most likely to suffer under this new regime.
F. With the increase in the number of situations
that will be liable to a penalty, we urge HMRC to make faster
progress in making their processes more "joined up"
so that, for instance, those who notify a child leaving school
for child benefit purposes are automatically treated as making
the same notification for tax credits (or vice versa).
G. We are not sure how well the reduction
in the time limit for reporting changes (to one month instead
of three) will work for those changes which need a little time
to become apparent eg the breakdown or formation of a household;
changes in working hours for those whose hours are not regular;
childcare.
H. We suggest that HMRC modify claim forms
so that, for claimants becoming newly entitled to tax credits
on getting a job, enough information is provided to ensure that
provisional payments do not run on into the next tax year if tax
credits are not due. This will prevent overpayments and save proactive
contact by HMRC.
POSITIVE CHANGES
ANNOUNCED IN
PBR DECEMBER 2005
1. We are pleased to see the new income
disregard of £25,000 as we believe this will lead most tax
credit claimants to be assessed on a previous year basis. (We
understand that very few claimants will see rises in their income
from one year to the next that are greater than this amount.)
Not only will this lead to greater stability in the current year
claims (income changes will not distort the ongoing claim), but
it will also avoid, for most people, the unsatisfactory position
we have at present, ie that claimants can find themselves in an
overpayment situation through no fault of their own. It is very
difficult to explain to a claimant that a pay rise or bonus they
have received towards the end of the tax year means that they
have to repay their tax credits for the earlier part of the year.
2. We also think that keeping the income
stable, by fixing it (effectively) at the previous year level,
will enable claimants to see more clearly the responsive nature
of the tax credits system, ie as their childcare goes up their
tax credits will increase (without being reduced by the income
from the extra work they are undertaking, remembering as above,
that under an annual system this increased income affects the
credits for the whole tax year). We have always argued that tax
credits are responsive to changes in personal circumstances, but—under
an annual, current year system of income measurement—not
so responsive to changes in income.
3. In view of the positive benefits of this
change we wonder if it could not be introduced earlier ie for
2005-06 rather than 2006-07.
HMRC'S RECOVERY
OF OVERPAYMENTS
4. Another matter which distorts the responsive
nature of tax credits is the 100% recovery of in-year overpayments
(where continuing tax credit payments allow). Thus someone notifying
an income rise in-year (of more than £2,500 under the current
rules), or notifying a change in personal circumstances which
decreased their award some time after the change occurred but
still in-year, could find themselves with no tax credit payments
at all for the rest of the tax year. Not only does this cause
difficulties in family budgeting; it also discourages the claimants
from notifying the changes in-year. This is because, if the claimant
had waited until the end of the tax year to tell HMRC of the change
(which in a lot of cases they are perfectly entitled to do), the
rate of recovery of any overpayment is based on the more generous
percentage limits in Code of Practice 26 "What happens if
we have paid you too much tax credit?" (COP26). We therefore
welcome the announcement to restrict in-year recoveries to the
same rates as cross-year recoveries. But we would be happier if
this were to be introduced earlier than November 2006. We understand
that it cannot be done automatically until 2006 but it could be
done manually by amending COP26 and giving top-up payments in
all cases of in-year overpayments. We think HMRC should consider
this for the reasons given below.
5. Under this heading we would also like
to highlight an issue concerning communication on overpayments.
We have been consulted on the new award notices and some of our
suggestions have been taken on board. However, we are concerned
that, in the latest versions we have seen, it is not clear that
the new award notice will clearly show the percentage rates of
recovery being applied to overpayments. Considering the complexity
of tax credits, and the diversity of numeracy skills held by tax
credit claimants, we think that these percentages should be transparent
so that claimants (or their advisers) can challenge them if they
think they are wrong. It will also help claimants understand what
is happening now and what is likely to happen in the future.
PROGRESS WITH
THE SIX
MEASURES ANNOUNCED
IN MAY
2005
6. Generally we have been working with HMRC
on progressing these six points and the Sub-committee will already
know that some of the measures have been implemented (eg suspension
of recovery of overpayments where there is a dispute). So we highlight
below areas which we are not sure are being addressed and which
concern us:
(a) We accept that the new award notice cannot
possible contain every last element of the calculation of the
tax credits award. Tax credits are too complicated. We have therefore
accepted that the part of the calculation showing how the maximum
credits are reduced will only be shown in summary. However—and
we have stressed this in the consultation meetings—it will
be necessary to be able to get to the detail of this "tapering
calculation" in some cases, to ensure that everything is
correct. We will be very disappointed if HMRC's promise that this
information will be available "on request", is not fulfilled.
It would lead to people still not understanding how their award
is worked out and this can only lead to further disputes.
(b) As mentioned above (see 4), pro-active
contact by HMRC to get claimants to notify in-year changes of
circumstances cannot be successful whilst any overpayment arising
is recovered in-year at the rate of 100%. If HMRC want claimants
to notify changes immediately, HMRC cannot leave claimants in
the position that they will be worse off if they do so.
(c) We have in the past asked for more transparency
on things like Gift Aid and pension contributions by putting a
box on the claim form. We therefore empathise with the comments
made at the October Treasury Sub-Committee on tax credits. We
also note that HMRC does not operate a "whole customer view"
with these sorts of things, ie they advertise Gift Aid for Tsunami
appeals on the front page of their website but do not mention,
there, the tax credits deduction available. We think more needs
to be done in this area.
(d) We know that shorter checklist type forms
are being prepared to go out with award notices and renewal packs.
We think these will be clearer in getting claimants to understand
their obligations. However, as already noted, tax credits are
complicated and claimants will also need some sort of reference
guide (perhaps just issued once, when they first claim, or annually
thereafter) if they are to understand how to work out their childcare,
their hours, their income, whether they are still living together,
etc, etc. We have asked for such a guide to be available.
(e) We are concerned that HMRC are not transparent
in explaining to claimants the rules on the backdating of awards.
Whilst we realise that the current emphasis must be on reducing
the overpayment problem, surely it is also important to explain
clearly to claimants what they are entitled to? After all, if
some backdating which is due has not been given to a claimant,
this will reduce the size of any overpayment! In this regard we
think that much could be done to improve the information on the
claim form so that backdating is more accurate the first time
around. At present some claimants have to know that backdating
has not been given (which they may only do if they go to an adviser)
and then apply to the Tax Credits Office (TCO) to get it. This
does not seem satisfactory.
(f) We have seen cases where it is clear
that no sanity checks have been made on award notices, eg How
can someone be working in an employment and have an income of
Nil? How can someone's childcare costs be greater than their income?
How can the number of children differ in different parts of the
award notice? We think that the computer system should be changed
so that errors like these are isolated for checking, or are just
never possible in the first place.
OTHER SUGGESTIONS
TO IMPROVE
THE CURRENT
ADMINISTRATION OF
TAX CREDITS
7. We are aware that mistakes are often
made in calculating the weekly childcare figure for tax credit
purposes. This is particularly true for those who experience varying
costs and are asked, by the guidance, to calculate an average—often
having to predict costs for the next 12 months. Along with others,
we wonder whether tax credits are the best way to deliver the
childcare help, but assuming that no policy change is possible,
we think more needs to be done to improve understanding in this
complex area. Perhaps there should be a dedicated team in the
TCO, and/or a separate Helpline, for childcare issues. Such a
team could also deal with the complexities that arise when people
have time off work to have, or look after, new additions to the
family. These claimants' hours will decrease but in many cases
they will still be treated as in work for tax credit purposes.
Under the new rules, will this be a change that has to be notified?
People will need guidance on this point.
8. We understand the TCO cannot accept or
"capture" information provided in advance. All notifications,
like a child leaving school, have to be made after the event has
happened. We see no reason why claimants have to wait until they
are actually being paid too much before their credits can be changed.
IMPLICATIONS OF
OTHER CHANGES
ANNOUNCED IN
PBR
9. There are to be more changes in personal
circumstances which have to be notified within a specific time
limit. These are:
— ceasing to work 16 or 30 hours, and
— a child or young person ceasing to
be a qualifying child or young person.
We can see the reasons for these changes, but
urge HMRC to make faster progress in linking information they
may already have from another source before imposing penalties
on a vulnerable sector of society. For instance, information on
a child ceasing full-time education may already have been received
by HMRC in connection with a child benefit claim (and in fact
is often notified in advance). Information on ceasing work may
have been notified through the P45 procedures. It would be unfair,
in our view, to impose a penalty where HMRC had already been told
about the change through another administrative procedure. The
position is particularly unsatisfactory where a child is leaving
school, because at present, the tax credits computer automatically
carries on making the payments of Child Tax Credit until the young
person reaches the age of 19.
10. We would also like to see HMRC only
imposing a penalty for late notification where there has actually
been a loss to the Exchequer. In many cases where hours have been
reduced, although maximum tax credits may decrease, the net amounts
may not. This is because reductions in working hours usually mean
reductions in income and the less the income, the greater the
amount of net tax credits. We have already submitted detailed
computations on this point to HMRC.
11. We are also concerned about the shortening
of the time limit for notifying all compulsory changes to one
month instead of three. Whilst again we can see the reasons for
this, we think some of the practical implications may not have
been thought through. Those who work varying hours may not know
when their hours have permanently decreased; many who pay childcare
costs are told not to notify changes until they have lasted for
at least four weeks; and those who experience household breakdown
will often not know within a month, whether the breakdown is temporary
or permanent. If HMRC press ahead with this one-month rule, we
think a light-touch regime for the penalties will be necessary.
12. We are not sure that shortening the
time limit for renewal will be that successful in that 31 August
is at the end of a peak holiday period, particularly for those
with children. If HMRC are able to get provisional payments more
accurate is this shortening of the time limit really a good idea?
13. The new, large, increase in the income
disregard will mean that many claimants will effectively receive
tax credits on a previous year income basis. This, in turn, will
mean that many starting new jobs will only qualify in the tax
year that the new job commences, or in that year and the next.
This is partly because of the £25,000 disregard, and partly
because they may have less than a full year's earnings in one
tax year. We suggest that HMRC modify claim forms so that, for
this category of claimant, enough information is provided to ensure
that provisional payments do not start in the next tax year when
they are not due. This would be another example of information
provided in advance which HMRC would have to capture, but we cannot
see why it should not be done. It will save overpayments and some
of the proactive contact HMRC is suggesting they will do in the
proposals in the PBR.
9 December 2005
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