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Westminster Hall

Thursday 15 March 2007

[Mr. David Marshall in the Chair]

Tax Credits

[Relevant documents: Sixth Report from the Treasury Committee, Session 2005-06, HC 811, and the Government’s response thereto, HC 49.]

Motion made, and Question proposed, That the sitting be now adjourned.—[Steve McCabe.]

2.30 pm

Mr. Michael Fallon (Sevenoaks) (Con): On behalf of us all, I welcome you to the Chair, Mr. Marshall. I am grateful for the opportunity to debate the Treasury Committee’s sixth report, which was published last June, and which the Sub-Committee followed up by taking oral evidence from the Paymaster General yesterday afternoon. I understand that the transcript of those proceedings is available to hon. Members.

The Committee has not been alone in inquiring into the matter. Ours is one of a series of reports on tax credits. The Parliamentary Commissioner for Administration reported on the subject in June 2005, and the Select Committee on Public Administration reported on her report in January 2006. Also in 2006, the Select Committee on Public Accounts reported on the Inland Revenue standard report 2004-05 of the Comptroller and Auditor General.

It is important to state at the outset that neither those reports nor the Treasury Committee’s questioned the principle of tax credits. Our inquiry focused solely on their administration. I hope that it is understood across the Chamber that no one is opposing tax credits in principle. Indeed—I hope that I will be forgiven this personal reminiscence—the Paymaster General will recall dealing with the paving legislation, the Tax Credits (Initial Expenditure) Act 1998, nine years ago, when I was her shadow. At that time, I said,

we were then discussing the working families tax credit—

I hope, therefore, that there is a general acceptance that the principle is not at issue. Indeed, I shall go further than that, given that the Paymaster General is here, and say that it is clear to the Treasury Committee and to me that tax credits have been successful in improving benefit take-up. It is also pretty clear, four years after their introduction, that they have improved the incentive for people to return to work.

The Committee took evidence from all the key parties involved, especially those who work directly with claimants—I am grateful for their evidence—and found that where the system has been less successful is in its implementation and administration. It is clear that there
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were serious faults from the outset in the design and implementation of the system’s administration. The Government recognised those problems in the 2005 pre-Budget report when they introduced structural reforms to tax credits. The Committee noted that the Chancellor of the Exchequer did not rule out, should problems with the structure of the system persist, a return to the original fixed awards system.

What are the fundamental flaws of the present system? First, it was clear to the Committee from our evidence taking—not only did we take evidence from those who handle claims, but we visited the tax credits office in Preston—that the administration of tax credits was and is insufficiently claimant-centred. It is the circumstances of the poorest people and those who are most in need that fluctuate the most often, and not simply from year to year. The system that deals with their needs should be the most flexible, but it is not. Many of the people whom we as constituency MPs have had to help budget not for a year, but for a month or less. The income of many such people becomes more variable after they begin to receive tax credits.

Secondly, Revenue and Customs still does not fully assess, as other Departments that administer benefits do, the scale of official and IT error. We now have a pilot programme, the results of which suggest an official error rate of about 5 per cent. As the hon. Member for Leeds, East (Mr. Mudie) brought out very well yesterday, the Department for Work and Pensions publishes regular error statistics, but the best that we are told about the IT system is that it is now only stable.

Mr. Mark Todd (South Derbyshire) (Lab): Does the hon. Gentleman agree that when the Committee visited Preston, we gained the strong impression that there is an astounding lack of the quality management information that is needed to enable the operation of the system, targeting of resources and coherent understanding of what is going wrong?

Mr. Fallon: Yes, I agree. The hon. Gentleman brings his IT experience to bear. I shall come back to the lack of a joined-up approach with technology, particularly the lack of access to the whole picture that people have when dealing with claimants, including the most complex cases.

The third flaw is the most notorious: the extent of wrong payments—both overpayments and underpayments. We have the figures for the second year of operation, 2004-05, in which about 5 million people received tax credits. Of those 5 million, 2 million were overpaid and 900,000—very nearly 1 million—were underpaid. That amounts to a total of nearly 60 per cent. wrongly paid. I fully understand that the Paymaster General might contest those figures and might wish to explain a little more than she was able to yesterday how they are compiled. However, let us be clear that the scale of overpayment and underpayment is still far in excess of what might have been anticipated. The total amount of money that was overpaid might have decreased, but the total amount that was underpaid, which is much more serious in a way, has increased. The overall scale of erroneous payment is still worryingly high.

The fourth problem is in the recovery system. Given the scale of overpayments, how are they to be reasonably recovered? The Committee urged several solutions on
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the Government. First, we recommended that in each case there should be a pause before recovery, but that has not yet been implemented. Secondly, we asked for the publication of written guidelines for the streamlined procedures. It looks as though those procedures operated in the period before the disregard was increased, but in a particularly arbitrary way. Thirdly, we asked about the whole rationale for writing-off. It became clear that the new streamlined procedure did not apply to those whose disputed overpayments were not written off before its introduction. That is shown by the substantial drop in the number of payments now being written off—the relevant figure of about 44 to 45 per cent. in 2005-06 appears to have fallen dramatically to just 3 per cent. in the opening nine or 10 months of the current financial year. HMRC is clearly taking a much harder line. A number of colleagues will be aware of that through their constituency casework.

We should also consider the test of reasonableness. Yesterday, the Paymaster General’s evidence to the Treasury Committee fell back on the defence that HMRC was using the same sort of test as the Department for Work and Pensions. The situation might be better described as being the other way round: the DWP might well be employing the test of reasonableness used by HMRC.

We should also consider the question of appeals. I am not talking about the appeal against the decision on whether or not someone is entitled to a tax credit, but the appeal in relation to the decision on disputed overpayments. We have recommended an appeal mechanism. The Paymaster General has refused to concede one, but, significantly, she has at least given an undertaking. Yesterday, in answer to the hon. Member for Leeds, East, I believe that she undertook to refer this important issue of comparability between the appeals system operated by the DWP and the appeals system that she is refusing for the HMRC to the Treasury solicitor to see what type of comparability can be properly established.

The fifth issue that the Committee focused on was the extent of fraud and losses. Our concern was that the data from each year are not published for a long time. That may be the result of something inherent in the tax credits system, but we did not see the full extent of the fraud and losses for the first year of operation, 2003-04, until July 2006. The data for 2005-06—the 12 months up to last March—will not be published until this summer. It is difficult for those outside the Department and those in this House who wish to scrutinise these matters to get a clear handle on whether fraud is increasing and on whether the losses to the Exchequer are mounting.

One crucial test is the extent to which HMRC is able to check properly whether the right people are being paid the right amount of money. As I said, 5 million families received tax credits in 2004-05—the second year of their operation—but only 2 per cent. of the claims were fully checked for compliance. I appreciate that other basic checks are carried out, but that is an extraordinarily small percentage; only 100,000 or so claims out of 5 million are checked for full compliance before they are paid out. The Paymaster General might wish to add to the answers and reassurance that she attempted to give the Committee yesterday afternoon.

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I would also like to press the Paymaster General for a little more detail on the extent of losses. It has been put to us that they could amount to as much as £1 in every £3 that has been overpaid. This is the other side of the overpayment coin. On the one hand, HMRC is now making a strenuous effort, applying its tests more harshly, refusing to write off overpayments and attempting to recover them, but on the other hand, it appears that a formidable sum was written off in the first two or three years of operation and will not be recovered to the Exchequer.

The next area of concern for the Committee was the culture of HMRC. That is not necessarily a reflection on the staff whom we met or the staff who are operating in HMRC, who were confronted for the first time with being part of the benefits system. Those who worked in the Revenue and in Customs had no previous experience of that system and a cultural shift in the way that civil servants and officials discharge their duty was necessary. The overwhelming impression that the Committee was left with, as we mentioned in our report, was that the administration of the system was based around functions and tasks rather than around the needs of claimants. Claimants with the most complex cases did not have one person in charge of their case to whom they could turn. The operators on the other end of the telephone could not see all aspects of a case on their screens, simply because of how the administration was set up. We noted that concern.

It is worth putting on record the fact that the Government’s response to our report was three months overdue. It was published after the deadline of two months for responding to a Select Committee report. I should say, however, that the Paymaster General has apologised for the delay. She has examined our proposed reforms and made some progress in improving some of the processes. We now have the clearer award notices and the playback statements, there has been an improvement in the helpline, and it appears that there has been an improvement in the accuracy of awards. All of that is extremely welcome, if not somewhat overdue.

The tax credits system is now ending its fourth year of operation after almost five years of preparation. It is an enormous system, paying out £16 billion in tax credits in 2004-05. It is essential for our constituents and taxpayers that it makes the payments as efficiently as possible, without fraud or losses, and that it does so as effectively as possible. It is particularly important that it helps those in greatest need. It is the claimants of tax credits, not hon. Members attending this debate or the Treasury Committee, who will be the real and best judges of whether the system is working successfully. The evidence that the Committee took, the recommendations that we make and the contents of the postbags, e-mails and phone calls that our offices receive all combine to give us the strong impression that there is still a long way to go to improve the administration of the tax credits system to the point where it is properly efficient and effective.

2.48 pm

Mr. George Mudie (Leeds, East) (Lab): It is a pleasure to follow the hon. Member for Sevenoaks (Mr. Fallon) and to be under your chairmanship once again, Mr. Marshall. This makes it twice in three
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weeks—some people might think that we had better stop meeting in this fashion.

I want to touch on two or three matters that we raised in the Sub-Committee yesterday. The hon. Gentleman’s opening remarks set the tone, because this is not a debate about the principle or the policy of tax credits; it is about their administration. If we had had this debate nine months ago, there might have been more people in the Chamber and the words being exchanged might have been warmer, but not in terms of being friendlier. I am never much in love with Treasury Ministers, and we usually give them a hard time, but I pay tribute to the Paymaster General. We all recall the ombudsman’s special report that was brought about because of the number of complaints that the ombudsman had received about tax credits. We also remember the special statements and many questions in the House, and the responses from hon. Members on both sides of the House.

It was interesting that proceedings in yesterday’s Sub-Committee were much calmer. There were differences, but they related to just a small proportion of the complaints that arose from the ombudsman’s report. It is a tribute to the Paymaster General that she pushed that massive department into acting. Members of the Treasury Committee know that Her Majesty’s Customs and Excise is not easily pushed, because it is like steering an ocean liner, and we all know the time lag when it changes direction. It is a tribute to her that in nine months she has managed to clear so many issues from the decks. Our debate might be seen as something of an anticlimax, but it is a good opportunity to put on the record some of the matters that remain outstanding and some of those that we spoke about yesterday.

It would be remiss of me not to thank the people and organisations that gave evidence, including Citizens Advice and the Child Poverty Action Group—that reveals what evidence I have read. There was a fair bit of evidence from them, and they worked closely with the Sub-Committee, which has always been impressed by their earnestness, endeavour and compassion for their customers. As the hon. Gentleman said, that seemed to be lacking in the department.

A tax department is not used to negotiating or being compassionate. It collects money and has all the power. When a department has all the power, it tends to use it brutally with little time for people’s sensitivities. It was a new endeavour to ask HMRC to relate to the poorest people in the country, their benefits and other issues affecting their standard of living. It has taken some time to shift the culture and ethos of the department, but it is clear that, with helplines and so on, the ground is moving.

We must consider having a physical presence in the regions so that people can speak to another human being other than on the telephone. The Inland Revenue does that with tax problems. The last thing that people who are not used to computers or writing letters, and who are struggling to keep families afloat, want is to have a long, protracted correspondence about entitlements or payments, particularly overpayments. To be able to speak face to face to someone with access to a linked computer with the customer’s details would be invaluable, and if claimants were treated as customers rather than clients that would be an enormous step forward.

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I want to touch on two major matters that I raised in the Sub-Committee and to which the hon. Gentleman referred. The first is entitlements. We welcome the appeals procedure for entitlements. If the tax credit people make an award and the recipient is unhappy about it, there is an independent appeal process. People can appeal, but CPAG said in the Sub-Committee that it had experienced some difficulties. To describe it in immigration terms, if someone receives a bad decision from the Home Office through an entry clearance officer and appeals, the matter is taken from the Home Office and administered by the Asylum and Immigration Tribunal. CPAG indicated that HMRC acted as the gate-keeper and decided whether an appeal was valid.

That is not acceptable. We were assured yesterday that that did not happen but, in the best civil service fashion, the assurance was somewhat vague inasmuch as we were told that differences had arisen and that there had been discussions with CPAG, but that they had been resolved and that HMRC was not acting as gate-keeper. It would be good if that were so, but were the difficulties that were mentioned euphemistically in fact HMRC acting as the gate-keeper and deciding which claims went to appeal? Does the phrase, “We have now settled our difficulties,” mean that a proper system is now in operation?

I think CPAG takes offence—perhaps I am wrong—when the Revenue receives a complaint and a request for appeal, and takes the opportunity to try to negotiate. That could be seen as interference, but I am not sure that it is. To return to my comparison with immigration, I welcome it when a constituent wants to appeal and brings the matter to me first, because I can ask for a review. It can save the country, the constituent and the Home Office a lot of money if the entry clearance officer takes another look at the case and considers whether they really want it to go to appeal. Too often they say yes, but that is what happens with entry clearance officers, and I am sure that that does not happen with the Revenue. I welcome the opportunity of a review procedure and do not see it as interference, as long as it is made absolutely clear in every piece of literature that is sent to the customer that the decision is not final and that they have a right of appeal to an independent body.

As the hon. Gentleman said, this debate is not about the principle of the tax credit system. The hon. Member for Inverness, Nairn, Badenoch and Strathspey (Danny Alexander) wants to change the system, which causes some difficulty, but a good part of the system is its flexibility and not using fixed figures. As the Paymaster General said yesterday, 700,000 people benefit from the in-year changes, so I do not want them to go easily. However, because the system is flexible and retrospective, there is a period before the income that people said they would receive and that which they actually receive is examined, and if there is a difference HMRC seeks to claw it back. That is bad, and it almost encourages disputes, arguments and unhappiness if claimants are told to repay money that has probably been spent, especially if someone is low paid, because the claimant thought it was an entitlement. When that happens, they must think, “This system was designed to take me out of poverty, but it is pushing me further into it.” My plea to the Paymaster General is that if we want to have flexibility, we must deal with the way in which overpayments are handled.

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