Select Committee on Treasury Written Evidence

Memorandum submitted by the Low Incomes Tax Reform Group


  LITRG welcomed the Sub-Committee's previous report into the administration of tax credits which, whilst recognising the reduction in poverty achieved by the tax credit system, also highlighted its administrative weaknesses. We would make the following key points now:

    —  As we stated in our previous submission to the Sub-Committee, we believe that the basic structure of the tax credit system remains a good and responsive way to alleviate poverty, providing that the difficulties in the system can be adequately resolved.

    —  Unfortunately, since the last report LITRG have seen many cases that indicate the tax credit system has a long way to go before this is achieved. Indeed many of the recommendations we make in this report echo those that we made to the sub-committee previously. It is disappointing to note that many months later these deficiencies remain.

    —  The main problem area is still overpayments, their recovery and the process attached to disputing them. If not carefully handled, overpayment recovery still has the potential to exacerbate poverty rather than relieve it, particularly when so much reliance is placed on computer programs while one-to-one customer service takes second place.

    —  Application of the "reasonableness test" under COP 26 should be subject to a regular independent audit which, as well as being made public, should be used to produce better guidance for TCO staff.

    —  A formal right of appeal to an independent tribunal, against HMRC's decision on whether or not to recover an overpayment, is long overdue and absolutely essential.

    —  HMRC should place less reliance on IT and concentrate more resources on human interfaces, particularly customer support, in order to meet adequately the needs of claimants who are most vulnerable.


  1.1  The Low Incomes Tax Reform Group (LITRG) is an initiative of the Chartered Institute of Taxation to give a voice to the unrepresented in the tax system. It aims to help people on low incomes to cope with their tax and tax credits, and campaigns for a more friendly tax and tax-benefit system for the unrepresented. Tax credits, where the tax system meets social security, has formed a major part of our portfolio since the inception of the working families' and disabled person's tax credits in 1999.


  2.1  Under HMRC's COP 26 guidance, if an overpayment arises through official error, HMRC will write it off if they are satisfied that the claimant could reasonably have thought their award was right ("the reasonableness test").

  2.2  Our previous evidence to the Sub-Committee, both written and oral, expressed our concerns that the reasonableness test was been operated rigidly, according to criteria which failed to take account of claimants' individual capacity to understand their award notices and the complex system behind them. From the cases we see there seems to have been no relaxation in those criteria.

  2.3  A case which came to LITRG in 2005 and which has only recently been resolved clearly highlights the continuing problem with the reasonableness test (See "Mrs G" in the Appendix).

  2.4  We recommend that the decision-making process should be subject to a regular independent audit. Although we accept that this may not help the individual immediately, it would over time lead to a better understanding of what was being taken into account in these decisions and give a basis for better guidance on what should be taken into account.


  3.1  There is no statutory right of appeal against a decision of HMRC to recover an overpayment. If HMRC decide not to write off an overpayment because they believe a claimant has failed to meet the reasonableness test the claimant can only complain to HMRC about their own decision-making, or refer it to the Adjudicator, the Ombudsman or ultimately the High Court by way of judicial review.

  3.2  Our previous evidence expressed our concerns that HMRC were operating as judge and jury in their own cause. This consideration, together with the bad decision-making we had seen, led us to recommended that a formal right to an independent tribunal was an urgent necessity, a recommendation that was supported in the Committee's report.

Absurdity and inconsistency in decision-making

  3.3  Since that date our cases continue to show that the quality of HMRC's decisions has not improved, with absurd conclusions sometimes being reached, while cases with identical material facts sometimes give rise to different decisions.

  3.4  LITRG have recently had a case brought to our attention where the claimant disputed the overpayment many times, meeting with a refusal to write off on each occasion. (See "Mr D" in the Appendix. Mr D's case is one of many that show absurdities in HMRC's decision-making.)

  3.5  Another case that came to us recently was identical in all material respects with an earlier case, but HMRC reached a different decision on each, showing how inconsistent their decision-making can be.


  3.6  HMRC's reply to our letter of dispute on case mentioned in 3.5 was riddled with elementary errors: the addressee's name and address were wrong, the letter began by addressing the adviser then continued by addressing the claimant, and it ignored most of the points that our letter had raised. Clearly, this case had been given scant attention by the Overpayments Dispute Team before being rejected.


  3.6  While we welcome the facility for a dissatisfied claimant to refer cases to the Adjudicator, that Office is bound by the policies and practices of the Department and cannot, with the best will, take the place of a formal appeal to an independent body. Yet the poor quality of decision-making that we see convinces us that the need for such an independent appeal is now more pressing than ever. We again urge that a formal right of appeal to an independent tribunal be implemented with urgency.


  4.1  In our previous written submission to the Committee we expressed our concerns about the volume of decisions that are delegated to the computer and the resulting errors. We advocated that more human intervention and face-to-face contact, whilst expensive, was a necessity if the system was to work as intended.

  4.2  LITRG are still seeing many tax credit cases where the underlying problems are IT related. Examples include:

    —  The termination of awards for no reason other than a "system error". This has left families on the lowest incomes surviving on only payments from Income Support or Job Seekers Allowance for many months. In the cases we have handled the TCO have not dealt with these matters with any urgency, leaving people destitute.

    —  Delays in processing of awards which have run into many months, in one case 14 months. The only explanation given is system error that no-one seems to be able to rectify. The consequences for these families are dire. This includes mounting debts and children without even basic provisions such as food and clothes. Again there has been no urgency in dealing with these cases.

  4.3  Even in a case where we have spoken with HMRC staff who accept that the award was terminated incorrectly, thus giving rise to a large overpayment for a disabled pensioner, they cannot resurrect the claim because of a system error.

  4.4  In these situations claimants are left constantly trying to contact the helpline, speaking to different people each time, losing out on passported benefits such as milk tokens (which can only be given on sight of a system-generated award notice) and left waiting for many months without money to support their family.


  5.1  It was acknowledged in the Sub-Committee's report that the transfer from DWP to the Revenue of administrative responsibility for delivering state assistance required a culture shift on the part of the Revenue. Customers who receive benefits and tax credits have different needs from the taxpaying population.

Vulnerable groups of claimants

  5.2  Many tax credit claimants have low literacy and numeracy levels, and some have learning disabilities. Many families have lifestyles that involve frequent changes when they may move in and out of work and relationships. More importantly, there is a large group of claimants who rely on tax credits as their main source of income. All of these claimants suffer great distress when tax credit problems occur, or when there is inadequate customer service to support them in resolving the problem.

  5.3  We recognise that HMRC has taken some steps to make this cultural transition. However we feel that they have fallen far short of the level of customer service and interaction that low income claimants need.

Over-reliance on IT

  5.4  We have already mentioned the over-reliance on IT to the detriment of low income claimants and their families. We have showed the horrendous delays that claimants in dire situations suffer at the hands of the Tax Credit Office who seemingly fail to appreciate the urgency of a claimant's situation when tax credits make up the bulk of their income. More human intervention and face-to-face contact, while expensive, is necessary if situations such as this are to be avoided.

Poor quality and delayed correspondence

  5.5  In addition we still often hear reports from claimants and other advice organisations about the long delays in receiving replies to correspondence. We have ourselves seen a letter dated 21 December 2006 in response to one sent to the Tax Credit Office on 14 February 2006. This adviser was lucky in that he received a response at all, many people still tell us that their letters of dispute and complaint go unanswered.

  5.6  Even when replies are received we have seen several cases where the reply was wholly inadequate and poorly written. Claimants and advisers alike have written submissions disputing overpayments several pages long only to be sent a reply of a few lines with reasoning that seems to belong to a wholly different case. There is no way of contacting the person who made the decision and therefore the only option is to write another lengthy letter and hope that it is answered. This causes cases to run on into months and years.

  5.7  Until HMRC fully adapt themselves to this new culture, and place less reliance on IT systems, the tax credits system will not succeed in fulfilling its aims. We repeat our earlier recommendation that HMRC concentrate more resources on human interfaces, particularly customer support, in order to meet adequately the needs of the most vulnerable claimants.



Mrs G

  Mrs G visited her local tax office in April 2004 to explain that the income on her award notice was considerably higher than it should be. She took evidence of her actual income as well as a copy of her Disability Living Allowance entitlement letter. She was told at this visit that her award contained various errors and that it would be revised in her favour. She was also told that she was entitled to extra money because of her disability.

  Shortly after this Mrs G received a new award which did increase her tax credits. It showed that she was now entitled to a severe disability element (in addition to the disability premium she was already receiving). Confused as to what these elements were for, Mrs G returned to her local tax office to question this. She was told that this severe disability element equated to the higher rate mobility component of her Disability Living Allowance. In fact this information was incorrect, the severe disability element is only payable if you receive the higher rate of the care component of Disability Living Allowance. However, Mrs G did not know this, nor could she ascertain this from the notes accompanying her form due to dyslexia. Mrs G presumed her award was correct as she had sought advice from her local tax office.

  Eventually her award was changed and the severe disability element was removed. This left an overpayment. Mrs G requested that this be written off, however the tax credit office refused to write it off.

  At the end of 2005 we wrote to HMRC on behalf of Mrs G We argued that Mrs G had provided the correct information at all times and that the severe disability element was added in error by HMRC following erroneous advice from Mrs G's tax office. In our opinion it was therefore entirely reasonable for Mrs G to believe her award was correct. We requested that HMRC write the overpayment off under COP 26.

  Initially HMRC argued that it was not reasonable for Mrs G to think that her award had been right. Even though she was wrongly advised by her local tax office that she was entitled to the severe disability element, it was not reasonable for her to believe them because the conditions for receipt of the severe disability element were "clearly stated" in the guidance notes accompanying her claim form.

  We reminded HMRC that Mrs G had difficulty in following complex reading matter such as guidance notes to forms because of her dyslexia, and it was for that reason that she had sought advice from her local tax office. Finally HMRC accepted our argument and wrote off Mrs G's overpayment in full.

Mr D

  Mr D applied for tax credits at their inception in April 2003. In November 2003 Mr D and his family moved to Spain, and he informed HMRC. Consequently his annual review papers for 2003-04 and his remaining award notices were sent to his new home in Spain.

  Shortly after his annual review in September 2004 he received a letter from HMRC asking about his move to Spain, whether it was permanent, the date he moved, and so forth. Mr D promptly sent back a response, which we know HMRC received because we have since been sent it by the Data Protection Unit in response to a Data Protection request.

  Mr D's tax credits payments were continued. Mr D presumed that as he had informed HMRC of his move, and they were sending award notices to his new home in Spain, he was still entitled to these tax credits.

  In November 2005 Mr D wrote to HMRC informing them that he was moving to Germany. Again this change was processed and his award notices were then sent to his new address in Germany.

  Finally in April 2006 Mr D's tax credits stopped. The reason given was that he was not entitled to tax credits after he left the UK in November 2003. The overpayment was in the region of £10,000. Mr D disputed the overpayment on the grounds that he had informed promptly of his move (evidenced by the award notices) and thus thought that because HMRC accepted this and continued to pay him there must be entitlement. This dispute was refused on the grounds that HMRC did not know of his move until April 2006.

  Mr D disputed the overpayment again. He explained in a very detailed letter that HMRC had been sending his award notices to Spain since April 2004 and therefore must have known of his move. He included copies of all of these notices. Again HMRC refused to write off the overpayment, again on the grounds that HMRC did not know of his move until April 2006.

  Mr D, extremely frustrated at this point, made a Data Protection request for copies of all of his documents held by HMRC. He obtained a copy of further documentation showing that he had answered questions in September 2004 about his move and confirming that all correspondence had gone to Spain and then Germany since at least August 2004.

  Mr D disputed the overpayment again. This time including copies of the documentation he had received from HMRC's own records. HMRC again refused to write off the overpayment, yet again on the grounds that Mr D did not inform HMRC of his move until April 2006.

  Mr D has written many more disputes and complaint letters, many of which have gone unanswered. His frustration lies in HMRC's complete disregard of the clear evidence he has provided, all of which was sent to him by HMRC.

  We are currently disputing this overpayment again as we feel that the decision was reached on grounds that were clearly absurd.

February 2007

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