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16 May 2007 : Column 297WH—continued


All hon. Members who have spoken have raised the problem of overpayments, which appears to be at the heart of the system’s difficulties. The Public Accounts Committee pointed out that since 2003 almost £6 billion had been overpaid, £500 million of which had already been written off. In reality, many families had absolutely no idea that they had been overpaid until they suddenly received an official notice from HMRC stating that they had been, but often without telling them how that had been calculated and nevertheless demanding that they pay the money back.

By definition, many of the families claiming tax credits have few if any savings. Overpayments therefore present them with a serious difficulty, not least because in most cases they honestly did not realise that they were in the wrong in the first place, because the system is so complex. We are now in a situation where HMRC officials admit to Parliament that many claimants do not understand the system because it is so complex, yet they are held responsible for not reporting to HMRC that they have been overpaid, by a system that it acknowledges they do not understand. When claimants appeal, they come up against code of practice 26, which says that they must not only prove that HMRC made an error, but pass a reasonableness test, to which I shall return.

All those problems have been well highlighted by Citizens Advice, both locally, to many Members of Parliament, and nationally. John Wheatley, the social policy officer of Citizens Advice, said the following about the weaknesses in the system, in a press release of 11 April 2007:

The Financial Secretary to the Treasury (John Healey): The hon. Gentleman is covering well-trodden territory, albeit in his characteristically thorough way, but I am not clear about one point. Would he waive all overpayments?

Mr. Francois: No. The Conservative party would not be in a position to give that commitment, because of the large amount of money involved. What surely must happen is for the administration of the system to be reformed, so that overpayments do not occur on anything like the scale on which they currently occur. Hopefully much of the misery would then be reduced.

Despite the problems that they are up against, more than 750,000 families appealed against a demand to recover an overpayment in 2005-06. However, the latest figures show that, whereas around half of all claimants might previously have had a part or all of the money waived, the rate of successful appeals is now down to below one in 20. The system is now massively weighted
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against those who appeal, because they are up against the strictures of COP 26, for the reasons that I have already illustrated.

John Healey: The hon. Gentleman argues that the system should be reformed, but it is not clear how he would propose to reform it. Would that include ending the flexibility in the system and going to a rigid payments system, as we used to have before tax credits?

Mr. Francois: The Financial Secretary anticipates me. If he will bear with me for another minute or so, I shall give him at least one specific example of how we might reform the system so that it operates more effectively. I have not whetted his appetite unnecessarily; I shall help him in a minute.

Given the problem of overpayments and the appeals system, nearly 90 Labour Members of Parliament have now signed early-day motion 545, which calls for a reform of the tax credits system and, in particular, of the appeals system for dealing with the whole issue of alleged overpayments. The Labour party has a lot on its mind at the moment; we all realise that. Nevertheless, it is an indictment of a system that was supposed to be one of the jewels in the Chancellor’s crown that not a single Labour Back Bencher has taken the trouble to come to Westminster Hall this afternoon to defend it—even at a time when one would think that they were keen to curry favour with the Chancellor. That speaks volumes about the problems in the system.

I want to make a specific recommendation to the Minister that might assist the situation and would constitute an element of reform. At the very least, when claimants are assessed as having been overpaid, could they not be sent a detailed calculation at that time that showed exactly how the alleged overpayment had been arrived at? In many cases, claimants get that degree of detail only once they have appealed to the tax credit office against the recovery of the overpayment. If the TCO has that information, why can it not be provided to the claimant with the overpayment demand so that the claimant can reasonably assess the calculation, go through it themselves and take an informed view on whether to appeal against the attempt at recovery?

Mr. Newmark: Will my hon. Friend give way?

Mr. Francois: Yes; I am tight for time, but I will.

Mr. Newmark: I shall take only a few seconds. Perhaps I could make another suggestion, although I appreciate that that is not really the prerogative of Opposition Back Benchers. The Government could also simplify the forms. If they were simpler, there would be fewer errors and the Government would not need to write off almost £2 billion.

Mr. Francois: My hon. Friend makes a good point. Many of those who claim tax credits are on marginal incomes, and they do not necessarily have detailed financial training. Therefore, making the system and guidance as easy as possible to follow would be of great assistance to the more than 5 million families who currently claim.

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I should say that HMRC has improved the quality of the awards notices that tell claimants how much they have been awarded. However, it has not provided the same detail and quality when it demands an overpayment. That is a gap in the system, and I have offered the Financial Secretary a specific suggestion.

In summary, the situation looks like this. The Treasury is now well and truly losing the argument on its current tax credits system. It has been criticised by the Public Accounts Committee, the Treasury Committee and the parliamentary ombudsman. Now even significant numbers of Back-Bench Labour MPs are calling for reform. To make it worse, the Comptroller and Auditor General has had to begin to qualify HMRC’s own accounts because of the level of fraud and error in the tax credits system. That is galling for taxpayers: their returns can be disputed by HMRC, yet the Government’s national auditor has to qualify HMRC’s accounts himself because of the failures of tax credits.

In the past week alone, the Chancellor’s highly complicated system has also been criticised by the BBC, ITV, Channel 4, The Times, The Daily Telegraph, The Guardian, The Independent, The Sun, the Daily Mail, the Daily Express, The Birmingham Post, the Yorkshire Post, the Bristol Evening Post, the press in the north of Scotland—and even the Evening Standard in London, which called the current system the “economics of the madhouse”. HMRC now admits that many of the claimants do not really understand the tax credits system, yet it still blames them rather than itself when things go wrong. As it operates, the system is the exact opposite of user-friendly, as anyone who has ever tried to contest an overpayment can testify.

The administration of the system needs to be considered again. It simply must be reformed. I hope that the Financial Secretary will agree.

3.54 pm

The Financial Secretary to the Treasury (John Healey): Like the hon. Member for Rayleigh (Mr. Francois), I should like to start by congratulating the hon. Member for Edinburgh, West (John Barrett) on securing this debate. It is almost a year to the day since he initiated his last such debate, which is almost becoming an annual fixture. I am just sorry that for this match I am a substitute for the Paymaster General. I shall endeavour to do the job as adequately as I can. This is my first debate on tax credits; I pay tribute to the hon. Member for Braintree (Mr. Newmark), for whom this is the fifth tax credits debate this year. I shall pass to the Paymaster General the good wishes of those who have spoken this afternoon.

The hon. Member for Edinburgh, West does not just pursue his concerns in set-piece debates such as this; I know because I have checked. Like many MPs, he presses the case of his constituents when there are individual problems. I am glad that the Paymaster General was able to resolve the problem that he mentioned at the start of his remarks. I cannot promise the same result, but I shall certainly look again at the case that he set before the Chamber this afternoon.

That said, the hon. Gentleman made one or two sweeping assertions about the tax credits system that I cannot simply glide over or let rest and with which I
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must take issue. The tax credits system is not in disarray, nor is it failing the people whom it was set up to help. Difficulties are caused when some people have obligations to repay the taxpayer for overpayments, when there is a basis for regarding them as due for repayment. We are conscious of the problems that that can create, and we are dealing with them—not least through the set of reforms that the Paymaster General set out in the pre-Budget report 2005.

With all respect to the hon. Gentleman, I felt that he was a bit grudging when he conceded that tax credits may have helped some people. Tax credits today provide support for almost 20 million people, including about 6 million families and 10 million children throughout the United Kingdom. Our figures show that in his own constituency 7,700 families benefit from tax credits. On average, the annual worth of those tax credit payments is more than £2,300 each year.

It is important to keep the issue in perspective. As constituency Members, we all come across individuals who are struggling with the system and have difficulties. Sometimes in such cases, HMRC has clearly made mistakes. However, let us keep things in perspective: 7,700 families benefit from tax credits in the hon. Gentleman’s constituency; in that of the hon. Member for Inverness, Nairn, Badenoch and Strathspey (Danny Alexander), 9,700 families benefit; in that of the hon. Member for Rayleigh, 7,100 families benefit; and in that of the hon. Member for Braintree, 10,600 families benefit. The hon. Member for Ludlow (Mr. Dunne) is not in his place but made a contribution earlier, and in his constituency, 7,100 families benefit from tax credits.

It is also important to compare the system with the one that predated it to underline both the significance of tax credit support and the scale of the investment that we, as a Labour Government, are putting in to support lower-income families. The spending each year to support tax credits—to support those lower-income families—is almost eight times greater than it was each year under the family credit system. Take-up, particularly among those with the lowest incomes of less than £10,000 a year, is at about 97 per cent. of those who are entitled. That compares with a 57 per cent. take-up of the old family credit system and only a 62 to 65 per cent. take-up under the first working families tax credits system.

Although rather in passing, it has been recognised today, particularly by the hon. Member for Inverness, Nairn, Badenoch and Strathspey, that tax credits have been central to helping people move into work and to making work, rather than welfare, pay. Tax credits, combined with our economic stability, have played a large part in the fact that 2.5 million more people are working in Britain now than 10 years ago. They have played a central role in reducing the net tax burden to those on low and middle incomes, ensuring that about four in every 10 families pay no net tax.

Danny Alexander: In setting out the benefits of tax credits and the numbers of recipients, I am sure that the Financial Secretary does not seek to trivialise the experience of those people who have suffered overpayments. He mentioned that there are 9,700 recipients in my constituency. Based on a statistical calculation across the country, that would suggest that some 4,000 families in my
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constituency have suffered overpayments. The fact that many of those families might not appeal or might not go to their MP for assistance does not necessarily mean that the overpayment was correct, but it reflects the fact that when people receive a letter from HMRC they feel that it is bound to be correct and go along with the system when it would sometimes be in their interest to challenge the conclusion, as those of us who have challenged other cases on behalf of our constituents can testify.

John Healey: As I have said, I am not trying to downplay the difficulties with some cases of overpayment and the anxiety that they can cause. I want to ensure that we conduct the debate with a proper sense of perspective that sets the understandable concentration on individual cases and problems in the wider context of the large number of people who are being helped by a system in which the Labour Government are prepared to invest a great deal in order to support more lower income families, to make work pay better and to help to tackle child poverty—the number of children in relative poverty has been reduced by well over 600,000 in the past decade. Those aims are important, and the hon. Gentleman recognised that when he said that tax credits were, in principle, a good idea.

Let me turn to the Public Accounts Committee report, which was mentioned by the hon. Members for Rayleigh and for Edinburgh, West. The PAC provides an important and valuable role in scrutinising Departments so that they provide good value for money and effectively deliver what they set out to deliver. It shares a close interest in doing that with the Treasury, and as Financial Secretary to the Treasury, I am privileged to be a formal member of the Committee, although I do not actively participate. We will respond fully and formally to the PAC report, as usual.

We have not resolved all the problems in the tax credit system, but I want to keep a degree of perspective. The arrangements are improving, and it is important to note that the PAC report is largely based on out-of-date data. Things are improving, and arrangements are being put in place to ensure that they improve for those who claim entitlement under the system. End-year adjustments that lead to an overpayment have already fallen by one fifth and improvements to the accuracy of processing and calculating awards are evident, but once the measures announced in the 2005 pre-Budget report come fully into effect, the level of end-year adjustments is expected to fall by a further third in future years.

HMRC is making some good progress in implementing the reforms laid out by my right hon. Friend the Paymaster General. Income disregard has been increased to £25,000, ensuring that almost all families with increasing incomes will not have their tax credit entitlement reduced in the first year of the increase. The renewal period has been reduced to five months, reducing the length of time for which some customers received payments based on out-of-date information, which has reduced overpayments. This year, the renewal period will be further shortened to four months.

Mr. Francois: I appreciate that this is not the Financial Secretary’s regular brief and that he is in the Chamber as a substitute. Nevertheless, will he confirm
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that when the Chief Secretary introduced what was known as the “PBR package”, which included at its heart the tenfold increase in the disregard, he followed that up with a written statement in 2006 that admitted that even that would reduce the number of overpayments by only a third? We now know from the National Audit Office and the PAC that the estimated additional cost of that package, and particularly of the increase in the disregard, is £500 million a year.

John Healey: The hon. Gentleman is wrong. The reforms need to be considered together as a package. The cost of the package was disclosed at the time of the pre-Budget report, and it was £50 million a year. The adjustments that would lead to an overpayment were already falling, and they will fall further as a result of the package of reforms that we are putting in place. The big increase in the income disregard plays an important part in the reforms.

I want to report on the progress on the other two reforms. The changes to make reporting certain changes of circumstances compulsory have been implemented.

Mr. Francois rose—

John Healey: I have given way to the hon. Gentleman twice and I want to respond to other hon. Members. However, I shall give way one last time.

Mr. Francois: The Financial Secretary said that I was wrong, but I am not. When the summary of the PAC report discussed the increase in the disregard, it said:

The PAC said that, not me. I am not wrong.

John Healey: Those figures are about the increase in the entitlement. The figures that were reported at the time and that I was talking about were the cost of the overall package of reforms. There is no inconsistency between the two figures.

Finally, the amount by which payments can be reduced in order to recover an in-year overpayment has been restricted significantly for low-income customers. The hon. Gentleman mentioned the debate that he had on this subject with the Paymaster General after the Treasury Committee report was published. She announced that HMRC was about to start a pilot designed to help a group of claimants at one of the most difficult times of their lives, when relationships break down. It has conducted that pilot and is now carefully considering the results. I hope that we will be able to draw conclusions about a potential approach this summer.

Danny Alexander: Will the Financial Secretary give way?

John Healey: If the hon. Gentleman does not mind, I shall turn to some of the points that he raised. If there is time towards the end, perhaps he can come back to me on any other points.

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The hon. Gentleman tackled me on a number of points about the ombudsman. First, he was concerned about claimants getting information about how overpayments arose. Since November last year, a full playback has been introduced. It contains a summary of the changes in circumstances that have been reported to HMRC and that have an impact on the award. When claimants receive the finalisation notice, which is sent to the claimant at the end of the tax year to confirm the tax credits to which they were entitled, it will contain information on their award throughout the previous tax year.

The hon. Gentleman was also concerned about the availability of more general information about tax credits. HMRC publishes a huge amount of information on tax credits. The next publication will be on 22 May, and he referred to that. Inevitably, the annual system of tax credits means that some data cannot be produced in real time. For instance, let us consider fraud estimates. In order to produce such estimates, they must be based on an examination of or inquiry into a sample of finalised awards. They take time to work through and to establish, and so information of that nature cannot possibly be produced in real time, as the hon. Gentleman has urged.

The hon. Gentleman took me to task on the ombudsman’s recommendations. I do not know whether he has seen the statement that she issued in July last year to accompany her annual report, which said:

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