Select Committee on Treasury Written Evidence

Memorandum submitted by HM Revenue and Customs


  1.  The Committee asked for a memorandum on the progress made on tax credits since the publication of its report, The administration of tax credits, in June 2006 (Sixth Report of Session 2005-06, HC 811-I). The Government's response described how HMRC had already responded to a great many of the Committee's concerns expressed in their report and this memorandum describes further progress under the broad headings set out in the Committee's report. In summary:

    —  The latest set of statistics confirms that around 6 million families and 10 million children continue to benefit from tax credits.

    —  In 2004-05 take up of the Child Tax Credit rose from 79% to 82% with 91% of the money available being claimed. Take-up amongst those of incomes of less than £10,000 is now 97%; and take-up amongst lone parents is now 93%.

    —  The Tax Credits Office has driven forward their change programme, introduced customer-focused improvements, and stabilised workloads.

    —  An earlier deadline of the end of August was set for renewals of tax credits claims in 2006. This was successfully implemented which meant that the length of time that some customers were receiving payments based on out of date information was reduced, thus reducing the amount of overpayments.

    —  Changes to make reporting of certain changes of circumstances compulsory have been implemented, to reduce the risk that overpayments will accrue as a result of late reporting.

    —  The amount by which payments can be reduced in order to recover an in-year overpayment has been restricted for low-income customers.

    —  A pilot will start in the next few months to provide an independent review of HMRC decisions on whether to recover an overpayment caused by official error.

    —  HMRC has published the results of the 2003-04 random enquiry programme together with "Tackling Error and Fraud in the Child and Working Tax Credits" setting out its plans to reduce error and fraud.


  2.  HMRC published its six monthly snapshot of the number of people benefiting from tax credits as part of National Statistics on 22 December 2006. They confirm that tax credits benefit around 6 million families and 10 million children, nearly 20 million people. 396,000 families were benefiting from the childcare element and the average weekly help with childcare costs for these families rose to £60. 103,000 families benefited from the disabled worker element and 34,000 benefited from the severely disabled adult element.

  3.  HMRC also published on the 1st March 2007 new figures which show that overall Child Tax Credit take-up was estimated at 82% by caseload in 2004-05—up from 79% in 2003-04. Take-up rates by expenditure—ie the proportion of available money taken up—was 91% in 2004-05 for Child Tax Credit, compared with 87% in 2003-04. Take-up rates by caseload are now 90% plus for many key groups. Low income working families with children have take-up of 90%. Take-up amongst those on incomes of less than £10,000 is now 97% (up from 93% in the first year of tax credits); and take-up amongst lone parents is now 93% (up from 91% in the first year of tax credits).

  4.  The 2006 Pre-Budget Report announced that the child element of the Child Tax Credit would increase by £80 to £1,845 from April 2007. This is in line with the 2006 Budget commitment to raise the child element at least in line with earnings until the end of the Parliament. The 2006 Pre-Budget Report also confirmed that the disabled child element of the Child Tax Credit, and the elements of the Working Tax Credit, would increase in line with inflation.


Pilot with the Adjudicator's Office

  5.  The Government's response to the Committee's report said that HMRC was exploring with the Adjudicator the feasibility of introducing an independent review of HMRC decisions on whether to recover overpayments caused by official error. Such an arrangement has now been agreed and HMRC and the Adjudicator plan to pilot them in the next few months, with a proportion of cases being offered this new service. If a claimant disputes the recovery of an overpayment and after review the Department concludes it is recoverable under the Code of Practice 26, they will give the claimant the option of having this case reviewed by the Adjudicator by a fast track process. This will be an alternative to the current procedure where the claimant then has to make a formal complaint about the handling of their case, and that case has to be first reviewed as part of the Department's complaint handling procedures.

IT enhancements

  6.  As promised in the Government's response to the Committee's report, IT changes to automate the process to suspend recovery of overpayments while they are under dispute (instead of the previous manual process) were introduced in autumn 2006. Another enhancement introduced, which the Committee were keen to see implemented, improves the information contained in the Renewal notice so that the customer can check a full history of the changes made in the period of the award.

  7.  Other changes, including the introduction of a delay in recovering overpayments to allow the claimant to register a dispute, remain under consideration but implementation will depend on an assessment of the risks involved to the continuing IT service. HMRC are committed to implementing the package of measures announced at the 2005 Pre-Budget Report and have already made good progress in doing so, as set out in the following section, and to delivering a high quality service to claimants.


  8.  HMRC published on 7 July 2006 the results of a random enquiry programme for 2003-04 which estimated that the total error and fraud that favoured the claimant represented around 8 to 10.6% of finalised entitlement for tax credits in that year. During 2005-06 HMRC prevented three quarters of all attempted organised fraud that has been identified, protecting £409 million in payments.

  9.  HMRC also published "Tackling Error and Fraud in the Child and Working Tax Credits" setting out its plans to reduce error and fraud. This included strategies to reduce customer error by improving communications to ensure they are easier to understand, improving the quality of advice and work done by contact centres and providing better access. Strategies to tackle fraud included further developing risk assessment procedures, embedding compliance specialists in contact centres and working with other Government departments and the private sector to combat identity fraud.

  10.  HMRC are embedding compliance specialists in contact centres to provide additional support and specialist knowledge to assist staff working on the tax credits helpline. So far 10 specialists have been placed in 6 centres and by April 2007, 16 specialists should be working in all HMRC's tax credit contact centres. Early indications are that raising fraud awareness in contact centres is working, with contact centre staff referring more high-risk cases for detailed checking by compliance staff and HMRC estimate to date this has had a yield of around £15 million.


  11.  The Committee reiterated its welcome for the package of tax credit reforms announced at Pre Budget Report (PBR) 2005 in its report. Good progress has been made in implementing this in a number of areas.


  12.  Each year HMRC reviews all tax credits awards. It finalises the position for the previous year's award and determine the amount of tax credits for the current year based on the information given by the claimant.

  13.  In PBR 2005 the Government announced that, from 2006, the deadline for the return of this information would be moved forward from the end of September to the end of August. This reduces the time that recipients are being paid provisional payments, calculated on the basis of possibly out of date information from the previous tax year. This in turn reduces the need to make end of year adjustments.

  14.  When the Committee reported, HMRC was midway through the renewal process for 2006-07 for the first year on the shorter deadline. This was implemented successfully. It was supported by an advertising campaign throughout the period. The helpline increased its capacity to deal with a potentially more concentrated number of calls over a shorter time period. By 31 August HMRC had finalised 4.3 million cases compared to 2.9 million cases on that date in the previous year. So 1.4 million more claimants were no longer receiving provisional payments by 31 August. By 1 October 2006 HMRC had finalised 6.2 million renewal cases, 2 million more than it had achieved at the comparable point last year.

  15.  As a result of this significant progress, the Government announced in PBR 2006 that the deadline for the return of renewal information will be moved forward a further month from 31 August to 31 July, and starting in 2007-08, thereby further reducing the time that claimants may be paid on the basis of out of date information.

New reporting requirements

  16.  One of the themes of the package of measures announced in the 2005 Pre Budget Report was that claimants would receive clear messages that they need to report changes quickly and would be helped to keep their records up to date. From November 2006 it became mandatory to report ceasing to work at least 16 or 30 hours; ceasing to be responsible for a child or young person; and a young person or child ceasing to qualify for support. HMRC wrote to all claimants to tell them about the new requirements. This was supported by an advertising campaign which ran from September to December on TV, radio, women's magazines, online and in other targeted media such as payslips.

  17.  The Government also announced in PBR 2005 that HMRC would contact key groups of tax credits recipients to collect up to date income information before the start of the new tax year, allowing provisional payments up to the time of renewal to be set more accurately and so helping to reduce overpayments. HMRC wrote to over 2 million families on the maximum award or the first income taper during late January and early February asking them to give up to date information on income.

Automatic restriction of recovery for in year overpayments

  18.  The Government announced in PBR 2005 that there would be automatic limits on the rates of recovery of overpayments where awards are adjusted in year following a reported change of circumstances which reduces entitlement. This change was planned to be introduced in November 2006. Making this process automatic has involved significant changes to the IT system and, after extensive testing, HMRC concluded that the IT changes raised an unacceptable level of risk of incorrect payments to claimants. A decision was taken not to make the change on the original timetable. This was reported to Parliament by the Paymaster General on 6 December 2006 (Column 14WS-15WS).

  19.  However, the Government remained committed to ensuring that claimants could access the benefits of automatic restriction. HMRC therefore introduced a process involving IT supported clerical action to ensure that the rate of restriction could be applied to payments to claimants. From November, anyone who qualified and contacted HMRC about the adjustment to their payments had their payments restored to the rate taking account of the restriction. HMRC immediately took steps to ensure that this facility was brought to claimants' attention further. In January, HMRC introduced an enhanced clerical process with IT support to identify cases where a restriction was appropriate and apply a restricted rate of recovery automatically without the claimant having to ask for this. Currently these cases are being processed within 2 to 3 days of the change of circumstance being reported. This means that the in year restriction takes effect in the vast majority of cases by the next pay date or at worst by the following pay date. This is no different to what will be achieved by an automated restriction.

  20.  The overriding aim continues to be to implement changes safely without adding undue risk to the system's performance in paying claimants. HMRC are working hard to replace the current process with a fully automated solution. Based on the balance of risks and the need to implement this safely, HMRC are planning to do this by June 2007.


Tax Credit Office

  21.  The Committee's report stressed the need to provide a claimant centred approach in administering tax credits and the Tax Credit Office has continued to drive forward its change programme which was described to members of the Committee during their visit to Preston on 13 March 2006.

  22.  The office has since been fully re-structured, creating "clusters" of similar work and breaking down the silo-based approach which the Committee commented upon in its report. Front-line staff are increasingly engaged in developing and implementing customer-focused improvements. More responsibility has been delegated to junior and middle managers to help them drive up quality; deliver productivity improvements; and get decisions and responses back to customers as quickly as possible. And senior managers have begun to roll out programmes to coach and develop junior and middle managers—to improve TCO's overall management capability and performance.

  23.  This is already paying dividends. Since the Committee's visit, work volumes have stabilised significantly. For example, the TCO now routinely delivers a decision to most claimants within four weeks of recovery of an overpayment being disputed. TCO has managed to halve the number of complaints on hand at any one time and most claimants will now get a reply in less than six weeks. In addition, during this period of cultural and structural change, in 2006-07 (end February) TCO's accuracy figure is 97.8% against a PSA target of 95%.

Contact centres

  24.  HMRC Contact Centres has also been driving forward with an ambitious change programme with significant success. In 2006-07 we expect contact centres to handle over 24 million tax-credit calls, 1.4 million more than we did in 2005-06. We expect to answer over 99% of callers on the day they phone in 2006-07—compared to 98.1% in 2005-06. In 2006-07, we expect to reduce the number of calls who received an engaged or busy tone by almost 60% compared with last year. We also expect to report improved numbers of calls being answered in 20 seconds—rising from 57% in 2005-06 to around 83% for 2006-07.

Transformation programme

  25.  The Government's response to the Committee's report mentioned that HMRC was also working on an improved business design to deliver tax credits in the future. This now forms part of the Department's transformation programme designed to improve effectiveness and increase efficiency by improving our understanding of customers and basing the design of our processes on that understanding. For tax credits, the aim is to design a model of service delivery that takes account of the needs of individual customers and targets assistance and support on those who are most likely to need it.

  26.  We are also designing variants on the service we offer customers to suit different circumstances and plan to pilot these over the next few months. For example, we recently wrote to customers who had not given us an up to date estimate of their income for 2006-07, so that we would have more accurate data on which to base provisional payments for 2007-08.


  27.  The Committee felt that HMRC should publish more statistical information on tax credits. As the Government's response to the Committee's report makes clear HMRC already publishes a great deal of information on its website, which includes analyses of tax credits recipients in each local authority. There have been many requests for data for smaller areas from, among others, the voluntary and community sector, local authorities, the compilers of deprivation indices, local government, and the devolved administrations. In February, HMRC published data for each lower layer super output area, which are about the same size as wards, and is the National Statistics standard measurement for areas of this size. HMRC are seeking feedback from users about their compilation, presentation and dissemination, and their priorities for further improvement. In addition from January 2007, HMRC also has published figures of net payments of tax credits in each month, split between negative tax and payments of entitlement, going back to April 2003.

March 2007

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