Memorandum submitted by One Parent Families
1. INTRODUCTION
1.1 One Parent Families is grateful for
the opportunity to submit further evidence to the Committee on
tax credits (see Treasury Sub-Committee, HM Revenue and Customs
Spring Departmental Report 2005, HC 524 i-ii). We welcomed
the changes announced to the tax credit system in the Pre-Budget
Report, particularly the increase in the income disregard from
£2,500 to £25,000 and the introduction of automatic
limits on recovery of excess amounts paid where awards are adjusted
in-year following a reported change (in year overpayments). We
think that these changes will help to address some of the problems
identified in our earlier paper on tax credits/submission to the
committee (attached for reference), and will particularly help
to ensure greater income stability for claimants.
1.2 Taken together with the measures set
out by the Paymaster General in May, and the announcement that
recovery of overpayments will be suspended where these are disputed,
we hope that we will see substantial improvements to the experience
of tax credit claimants. However, problems remain that have not
yet been addressed by these announcements, including:
— The lack of a right to an independent
appeal of the decision to recover an overpayment.
— The need for better explanation
of why an overpayment has occurred and a delay in the recovery
of overpayments for 30 days.
— IT errors appear to still be
causing problems, and the system is still not geared up to deliver
a claimant centred response. There remains a need for a fundamental
review of the operation and design of the IT system underpinning
tax credits to see whether it is fit for purpose and can deliver
a claimant focused service.
1.3 In our previous paper we recommended
that childcare be taken out of the tax credit system, and we remain
convinced that this would be sensible. We also suggested that,
if problems continue, Government should consider returning to
a system of fixed awards. The changes announced in the Pre-Budget
Report should increase the stability of the system and reduce
the number of overpayments, but the lack of a clear analysis of
the cause of overpayments means that we do not yet know the extent
to which these measures will help. If problems continue, the case
for a return to fixed awards will be strengthened, and we welcome
the Paymaster General's statement that this will be kept under
review.[13]
1.4 We also have a particular concern about
the recovery of overpayments when couples separate. We believe
that there is a risk that they will be likely to be recovered
from whichever half of the couple has an ongoing claim, and that
this in most cases will mean recovering from a lone parent.
1.5 In this additional submission we briefly
discuss the changes outlined in the Pre-Budget Report, before
describing areas where action is still needed.
2. CHANGES TO
THE TAX
CREDIT SYSTEM
ANNOUNCED IN
THE PRE-BUDGET
REPORT
2.1 Increase in the income disregard from
£2,500 to £25,000.
This change is extremely welcome and should
help to significantly reduce the number of overpayments which
occurr both within and at the end of the year, although we note
that the Paymaster General estimates that this will only be by
a third. The change will not minimise those overpayments caused
by changes of circumstance. Our research found that these were
more frequent than had perhaps been anticipated—47% of our
sample had experienced between two and seven changes of circumstance
that would affect tax credit entitlement during the year.[14]
2.2 It is also worth noting that this change
will not impact on those whose income falls and then rises again
during the year—for example those on maternity leave. For
example, if a claimant goes on maternity leave and her income
falls from £30,000 to £10,000 within the year, but then
rises to £15,000 when she goes back to work, this rise of
£5,000 will not be disregarded, as the disregard relates
to income rises between one year and the next—in this case
the claimants income would still have fallen across years, rather
than risen.
2.3 Finally, it must be made clear to claimants
whose income rises that they will that, due to the way that income
is assessed on an annual basis, they are likely to see their award
fall again in the following year of their claim.[15]
Explaining this to claimants is likely to be difficult, and underlines
the complexity of the system. This reinforces the case for a system
of fixed awards.
2.4 From November 2006, HMRC will apply
automatic limits on recovery of excess amounts paid where awards
are adjusted in-year following a reported change.
Having called for this change we entirely welcome
it, as it should help to prevent the hardship caused by sudden
drops in income under the current system. We also welcome the
fact that recovery of overpayments will not be compounded where
these have occurred both cross year and in year.
We understand that the Revenue are considering
using hardship payments to affect a similar change during the
period from April to November before this change can be introduced.
This would be extremely welcome. The sooner that dramatic falls
in income as a result of the tax credit system are reduced, the
sooner claimants trust in the system will be improved.
2.5 From 2007-08 HMRC will adjust future
payments when an estimate of lower current year income is reported
but not make a one-off payment for the earlier part of the year.
This change has been introduced in order to
deal with situations where claimants overestimate a fall in their
income, which leads to an overpayment of tax credits when their
true end of year income is reported. The holding back of any underpayment
during an earlier period of the year should enable this to be
set against an overpayment which occurred in this way—forming
a useful buffer. On balance this change seems sensible, although
there are some concerns that this will deprive claimants of a
boost to their income at a time when it has fallen.
2.6 From 2006 the deadline for the return
of end-of-year information will be moved from the end of September
to the end of August; and starting in early 2007, HMRC will contact
key groups of tax credit recipients to collect up-to- date income
information before the start of the New Year.
These changes are intended to reduce the incidence
of overpayments caused by provisional payments being paid at incorrect
rates during the renewal period for tax credits at the end of
the tax year. Again, these seem sensible. It is important that
the limits on in year overpayment recovery are in place before
claimants are contacted to inform the Revenue of changes of income.
At present, if claimants report an increase in income towards
the end of the tax year, they may face a sharp drop in their entitlement.
We are therefore concerned about intentions to pilot this claimant
contact prior to the introduction of limits on in year recovery.
2.7 From November 2006 the range of changes
reducing entitlement that must be reported to HMRC within three
months will be expanded to include changes in work status or in
the number of children for which the family can claim support
and from April 2007 the time allowed to report a change that reduces
tax credit entitlement will be decreased from three months to
one.
While we understand HMRC's desire to reduce
delays in reporting changes of circumstance, we think that these
changes must be handled with a light touch approach. With changes
such as family breakdown, it may not be possible to report within
a month—we also think that when a new child enters the family,
reporting this change within a month may be difficult. Changes
in childcare costs have to have lasted for four consecutive weeks
to be reportable—in these cases the deadline for reporting
must clearly be one month from the end of this four-week period.
In all of these circumstances, a penalty of £300 for failing
to report a change seems excessive, and is likely to penalise
people who are also receiving a drop in their tax credit entitlement.
We hope that the Revenue will consider introducing a reduced penalty
overall, or taking a light touch approach to enforcement in these
cases.
3. IMPROVEMENTS
TO THE
SYSTEM STILL
NECESSARY
3.1 The Revenue must provide a better explanation
of why an overpayment has occurred and must delay recovery of
overpayments for 30 days.
We welcomed the Paymaster General's recognition
that there may be "more that can be done to alert claimants
about the recovery of an overpayment before HMRC starts to collect
it"[16]
and think that this must be a priority. We support the Ombudsman's
recommendation number 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.[17]
We think that this letter should also set out
that the claimant has 30 days before the payment will start to
be recovered, during which time they may decide to dispute that
recovery.
3.2 The Revenue must introduce an independent
right of appeal of the decision to recover an overpayment.
Claimants may appeal decisions about tax credit
entitlement, but not about the decision to recover an overpayment.
Yet the scale of official error within the new system has been
high. It is not clear how much of this was caused by computer
errors, and how much by errors of processing, for example failure
to input a change of circumstance that a claimant has reported
via the tax credits helpline, but we know that £37 million
worth of overpaid tax credits had to be written off in 2003-04
due to computer error. The Comptroller and Auditor General's Report
on the accounts of the Revenue gives details of additional errors
which led to write offs of overpayments. These included:
— Writing off £2 million
of overpaid tax credits caused by major software errors in 2003-04
and 2004-05 that altogether resulted in overpayments of £174
million.
— Writing off £33 million
in respect of some manual payments made in 2003.
— Writing off a further £95
million by June 2005 when official error relief had been granted
to claimants who disputed the recovery of their overpayment.[18]
3.3 Parliamentary questions show that significant
amounts of overpaid tax credits continue to be written off, with
£24,400 written off in July, £27,300 in August and £18,500
in September of this year.[19]
Claimants therefore lack confidence in HMRC's ability to pay them
the right amount of tax credits at the right time. As these figures
show, HMRC will write off overpaid tax credits where they have
made a mistake, provided that the claimant could have "reasonably
believed" their award to be correct. The lack of an independent
right of appeal means that HMRC acts as its own judge and jury
in such cases. While we accept that HMRC will want to retain this
test, experience to date means that neither we, nor claimants,
have any faith in their ability to do so fairly. The introduction
of an independent right of appeal of the decision to recover an
overpayment is therefore essential to restore faith in the integrity
of the system.
3.4 There remains a need for a fundamental
review of the operation and design of the IT system underpinning
tax credits to see whether it is fit for purpose and can deliver
a claimant focused service.
As outlined above, errors and mistakes appear
to continue to be a feature of the delivery of tax credits, and
this undermines confidence in the system, as well as being expensive
for the Government. Claimants who contact One Parent Famileis
advice line also continue to report receiving a poor service.
3.5 The model that has been set up for the
management of tax credits cases appears to work against good customer
service. Each transaction in a particular case is dealt with by
a different staff member, entirely at random and there is no consistency
of contact throughout a case. This can be incredibly frustrating
for claimants who can speak to several different helpline advisers
and receive different advice from each one. It also means that
in complex cases, or when problems arise that are difficult to
resolve, staff who have no history with the case can struggle
to understand or deal with it.
3.6 The Revenue have now set up a unit which
can deal with complex cases, named "Group 33" and based
in the Tax Credit Office in Liverpool. Cases are referred from
Call Centres to the Group, which takes ownership of and endeavours
to fully resolve them. The Group will call back a claimant within
36 hours of the initial enquiry to inform them of progress. Initial
evaluation of this process[20]
seems positive, although at present the Group can only deal with
a tiny proportion of cases, and, importantly, cannot deal with
overpayments. We think that this represents a good model of customer
service and would like to see it, expanded, and given a remit
to deal with overpayment cases.
3.7 We think that the development of such
a system to deal with complex cases may be the conclusion of any
review of the operation of the tax credit system, and the extent
to which it is appropriate to meet the needs of claimants. Such
a review should also identify the causes of IT problems and areas
where official error is common.
3.8 Recovery of overpayments when couples
separate.
We are concerned that when overpayments are
recovered from a separated couple, lone parents may be disproportionately
affected. When an overpayment has occurred in such cases, recovery
is covered by HMRC's Code of Practice 26 "What happens
if we have paid you too much tax credit?", which states
that:
"In a case in which a couple had broken
up and owed money in relation to tax credits before the break-up,
we would look at each case on its facts and take into account
the circumstances, income and expenses of each of the former partners
in reaching a decision."
However, we remain concerned that recovery of
such overpayments is more likely to be imposed on the claimant
who has an ongoing tax credits award—and that this is likely
to be the parent who retains care of any children. In enquiring
about this situation, we were told by the Revenue that:
"In the situation of a couple (or ex-couple),
we send a Notice to Pay to each of them for the full amount, but
it does not matter if one pays the full amount or they split it
50:50, or on some other basis. If one of them will not, or cannot
pay, or disappears, we will attempt to recover the full amount
from the other person."
As the partner with whom any children are left
is more likely to have an ongoing award, and to need to remain
in contact with the Revenue, we are concerned that they will be
made liable for any overpayment. At present however, guidance
around this issue seems very unclear, and we think that procedures
need to be more tightly defined.
4. CONCLUSION
We are pleased that the Government have listened
to concerns about the operation of the Tax Credits system and
are introducing changes that should improve income stability for
claimants and reduce hardship. However, the system remains complicated,
and claimants do not yet seem to be seeing the impact of efforts
to improve administration. Further reform is needed including:
— The introduction of a right
to an independent appeal of the decision to recover an overpayment.
— Claimants should be sent a letter
informing them of the cause of an overpayment and allowing them
30 days before it is recovered.
— A fundamental review of the
design and organisation of the IT system underpinning tax credits
is required.
— Clarification of how an overpayment
will be recovered when couples separate to ensure that lone parents
are not disadvantaged.
December 2005
13 Hansard, 5 December 2005, Column 57WS. Back
14
Griggs J, McAllister F and Walker R (2005) The new tax credits
system: knowledge and awareness among recipients One Parent
Families. Back
15
For example: A claimant earned £10,000 in 2005-06 and her
award for 2006 is based on this level. At the end of September
2006, she receives a pay rise of £10,000 and her salary is
therefore £20,000 for the rest of the year. When her award
is reassessed in April 2007, due to the operation of the increased
disregard, she will not have to pay back the tax credits she received
between September 2006 and April 2007 which were paid on the basis
of earnings of £10,000. Her award for 2007-08 however will
be based on her total annual income for the previous year-six
months at £10,000 and 6 months at £20,000 ie £15,000.
Her tax credits payments will therefore be lower during 2007-08
than in 2006-07. If the claimant stays in the same job during
2007-08, when her award is renewed, payments for 2008-09 will
be on the basis of an income of £20,000-her salary for the
entire year. This will mean that her tax credits will fall again. Back
16
Hansard, 5 December 2005, Column 57WS. Back
17
Parliamentary and Health Service Ombudsman (2005) Tax Credits:
Putting Things Right The Stationery Office. Back
18
HMRC (2005) Department of Inland Revenue 2004-05 Accounts
The Stationery Office. Back
19
Hansard 15 Nov 2005 : Column 1214W. Back
20
Provided to the Tax Credits Consultation Group by HMRC. Back
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