Memorandum submitted by Citizens Advice
In June 2005, Citizens Advice's report on tax
credits concluded that although tax credits provided welcome additional
money to low income families, the operation of the system and
the way overpayments were recovered caused serious confusion and
hardship to many families. We concluded that significant improvements
in the quality of administration and changes in the recovery of
overpayments were vital if key government objectives were to be
met, and confidence in the system restored.
In our evidence to the Sub-Committee's inquiry
in December 2005 we welcomed the measures announced in the 2005
PBR aimed at improving income stability in the tax credits system,
but continued to stress the need for further administrative improvements
and changes to the way overpayments are communicated and recovered.
Advisers report that they receive quicker responses from the TCO
to letters and we welcome recent initiatives aimed at improving
communication between advisers and frontline staff. However one
year on our position on the need for change remains broadly the
In 2005-06 Citizens Advice Bureaux dealt with
around 153,000 queries relating to tax credits and helped with
around 90,000 queries in the first six months of 2006-07. In 2006
Citizens Advice received around 4,000 reports about tax credit
problems their clients were experiencing. These were predominantly
about overpayments and poor administration. The volume of these
reports reflects not only the distress tax credit problems cause
clients, but the length of time it takes advisers to resolve the
problems. There are more, rather than less claimants experiencing
IT problems and having to receive manual payments
and the key improvements in the recovery of overpayments are yet
to be made.
We are seeing a steady stream of clients whose
bad experiences of tax credit overpayment recovery are causing
reluctance to continue with their claim. Others have heard about
problems and do not want to claim at all.
There is no routine explanation of
causes of overpayment, frequent conflicting figures.
No notice is given, recovery starts
automatically and immediately.
Households that change from being
lone parents to couples and vice versa can experience particularly
complicated overpayments and recovery regimes. This causes significant
drops in income from tax credits.
People getting both DWP benefits
and tax credits may experience even higher recovery rates. Before
tax credits rules limited deductions from benefit.
The delayed introduction of the automatic
limit to in-year recovery of overpayments has meant some families
continue to face dramatic cuts in their payments.
Serious ongoing payment problems.
Thousands still paid manually, as
IT throws them "off the system", adding complexity and
reducing transparency of payments and awards.
Delays and errors in responding to
changes of circumstances, for example when children reach 16.
Helpline staff not able to see claimant's
full up-to-date case records.
Postponing recovery action until
after communication with claimants.
A statutory right of appeal on overpayment
Further limits on recovery to prevent
excessive loss of income.
1. Loss of confidence in the tax credit system
We are deeply concerned by the growing numbers
of claimants who tell advisers that they do not want to claim
because they are afraid of being overpaid or simply worn down
by trying to resolve administrative problems.
A man and his partner had one child and both
worked seasonally, with some shift work & overtime. The bureau
had been helping them deal with a tax credit overpayment for over
a year during which time they had been asked to complete the same
form twice and spent many months waiting for a response to letters.
With the fluctuations in their work patterns and income they were
worried about getting further overpayments and told the bureaux
that they did not want to renew their claim.
A man on a low income had decided not to advise
the Revenue of the birth of his new baby as he feared errors and
overpayments. He was entitled to over £2,000 extra.
A bureau helped a single mother on a low income
get her tax credit problems resolved. She had been overpaid for
two years running, received lots of paperwork she did not understand
and wanted to get out of the system.
Another woman did not believe her payments had
been amended to take account of the changes of circumstances she
had reported. She had phoned to check several times but a year
later was still waiting for clarification as to whether her last
year's overpayment was £1,500 or £400. She came to the
bureau eager to end her claim as she was afraid of getting further
CAB advisers are generally able to encourage
people to continue claiming offering support in resolving any
problems. The annual cycle of renewals means that claimants receive
provisional payments in advance of renewing their claim. This
means that it is very difficult for claimants to end their claims
without finding themselves with overpayments. It is important
that helpline advisers are aware of this so that when claimants
talk about ending their claim they are advised of the consequences
of doing this and where possible encouraged to continue to claim.
Clients had been overpaid for the year 2003-04
because they had not spotted that her husband's income was missing
from their award. They disputed recovery but were told that they
should have spotted the error. The clients were very confused
about figures and contradictions and as their correct entitlement
was small, they decided not to renew in 2005-06. They were then
told that they would have to repay all the payments they had already
received. The adviser described them as confused by the system
and irritated and indignant at being expected to pay for someone
else's mistake for which they had had no apology and felt treated
like a criminal by the demands for payment they were being sent.
One bureau reported that their client "failed
to complete a renewal form this year, as he is still worried about
generating overpayments." His most recent award notice
showed that his provisional payments were being reduced to repay
an overpayment. The original overpayment arose from an error in
completing his application form but he could not understand why
this wasn't put right when the error was discovered. Failing to
complete his forms put this client at risk of further overpayments.
Recent take-up figures show that in 2004-05
there was an overall take-up rate for child tax credit of 82%
by caseload and 90% by expenditure.
These figures appear very encouraging but improving and claimant
confidence in tax credits is vital if take-up is to remain high
and in fact to increase. Poor administration and overpayments
must not undermine confidence in applying for tax credits or in
using them to help them to return or to increase hours of work.
2. Overpayments and recovery
Tax credit overpayments cause tremendous problems
for CAB clients. Claimants have considerable difficulty understanding
and clarifying; the amount of their overpayments; how they have
arisen; and recovery methods and rates. This provides claimants
with real concerns about claiming in the future or even changing
their current circumstances. Thousands face severe hardship when
payments are suddenly cut overnight.
We are disappointed that HMRC were unable to
meet the 2005 Pre-Budget report commitment to introduce an automatic
limit on in-year recovery in November 2006. From January 2007
the Tax Credit Office has been operating a manual process to limit
the recovery of claimants' overpayments. This removes the need
for claimants in hardship to request additional payments. However
the process requires manual intervention from the Tax Credit Office
which means claimants will receive an award notice and a cut in
their payments first and then a new award notice advising that
their payments will be topped back up again. The Paymaster General's
statement of 5 December 2006 advised that the process should be
automated from April 2007. We hope that they will be able to meet
Together the changes introduced this year following
the 2005 PBR should make a significant difference to families
but there are still many improvements to be made in relation to
how HMRC communicates with claimants about overpayments and how
they are recovered.
It is estimated that the £25,000 income
disregard together with the faster reporting requirements should
reduce the number of overpayments by one third. Overpayments will
still be a significant problem for families whose circumstances
change regularly, in particular where couples form and separate
during a tax year.
Our enquiry statistics show that in over half
of all overpayment enquiries (52%) the client is questioning the
recoverability of the overpayment rather than just seeking advice
on repayment. A much lower percentage of clients question their
DWP debts. Even those in child support arrears are less likely
to dispute their liability for them. This is mainly because the
Revenue have no routine method for explaining the cause of an
There is no routine explanation of
causes of overpayment, frequent conflicting figures.
The Revenue have no standard means of informing
people how an overpayment happened. It is frequently unclear how
an overpayment has arisen or even how much it is. Tax credit entitlement
is complex, particularly for families in vulnerable changing circumstances
and particularly for those who are self-employed and whose income
is less predictable. Bureaux are seeing increasing numbers of
clients who have been sent letters threatening court action but
still lack confirmation of the accuracy of the figure owed.
A claimant had an overpayment that they were
challenging as they did not know how it had arisen and could not
get an explanation. They then received a demand for over £3,000
to be paid immediately. The payments helpline advised that they
should not have received the letter, could not understand why
they had, and told them to ignore it.
In February 2007 a woman received notices warning
that legal action would be taken to recover an overpayment that
she had been trying to resolve for a couple of years. She had
also been told that the 2004-05 overpayment would be recovered
by stopping all further payments until it was all recovered. At
the beginning of the 2006-07 tax year she was told that she still
had an overpayment and had trying to get more details ever since.
She had all the relevant paperwork but could not get any explanation
of the overpayment. She found the legal warnings very distressing
and was very frustrated by the fact that different sections of
the Tax credit office did not hold all the same information.
One family had experienced a number of changes
in their family and work circumstances during 2005-06, and on
renewing their claim were told that they had been overpaid £620.
On phoning for explanation of the overpayment they were given
different figures for the amount due. One adviser told her that
their payments would stop to recover the money and another that
the payments would continue. Their payments stopped which put
them under huge financial pressure. In December she was told that
the overpayment was £2,500 less the £400 already recovered
by cutting her payments. Both the client and the bureaux requested
a breakdown of the overpayment but were instead sent new award
notices. By the time they received an explanation, at the end
of January, they were also told that most of it had been recovered
by stopping their payments for the three months earlier. The automatic
recovery had given the clients no opportunity to check, dispute
No notice is given, recovery starts
automatically and immediately.
It is essential that claimants are given notice
of recovery in order to help them adjust their budgets. Claimants
whose entitlement drops following a change of circumstance face
a double drop in their tax credit incomethe drop in entitlement
and the further cut as the overpayment is recovered. Families
on low-incomes have very tight budgets and this double cut with
no warning can often have a severe knock on effect on their ability
to pay their rent, mortgage payments and credit repayments.
In his evidence to the Treasury Sub Committee
in 2006, Paul Gray committed to introducing a pause before recovery
starts but said that due to the complex IT changes that will be
required, that this could take some time. This change is very
important for tax credit claimants, and particularly for families
on low incomes. We hope that this change will be introduced soon.
A client was struggling to manage the cut in
their income resulting from the recovery of a tax credit overpayment.
They had been unable to even confirm when and how the overpayment
arose. They found the documents sent by HMRC vague, and only served
to and add to their confusion. The bureau commented that the "immediate
recovery of the overpayment has reduced the client's income, leaving
her short of money for necessary household items without any warning
or chance to try to find a solution. "
Recovery of overpayments where households
change from a lone parent household to couple households or vice
People in these circumstances can experience
particularly complicated overpayments and recovery regimes. This
causes significant drops in income from tax credits.
HMRC has two different ways of recovering tax
credit overpayments. Tax credit overpayments are recovered by
requesting the money back directly (direct recovery) or by reducing
future tax credit payments.
Claimants do not have a choice about the method
or the rate of recovery. If they have an ongoing award, payments
will be reduced by 10%, 25% or 100%, depending on the size of
their tax credit award. If the overpayment is from an earlier
award, (ie when a single person was part of a couple or vice
versa) claimants will be asked to pay back the money directly
within 30 days, with an option to extend recovery over twelve
Claimants with an overpayment from both a past
and a current award can face recovery of both overpayments simultaneously.
This combined recovery will result in them losing much more than
the 10%, 25% of their tax credits.
Tax credit claimants who also receive housing
benefit can find that their entitlement to housing benefit is
affected by the method of tax credit recovery. Entitlement to
housing benefit depends on the income a claimant receives. Where
a claimant is not already receiving maximum housing benefit, a
drop in tax credit income will result in an increase in their
housing benefit. However, if they are repaying their tax credit
overpayment by making payments to HMRC then they will have a higher
income for housing benefit purposes and receive less housing benefit.
This means that two individuals with the same
disposable income and whose circumstances only differ in relation
to how their tax credit overpayment is being recovered will get
different amounts of housing benefit.
People getting both DWP benefits
and tax credits may experience even higher recovery rates.
Around 500,000 families who have been on benefit
since the start of the tax credit system continue to receive support
for children via DWP benefits. However a much larger number of
families (around 900,000) on benefit now receive support for their
children via tax credits. Rules limit deductions from benefit
but claimants whose income is made up from benefits and tax credits
can face deductions from both, leaving them on lower incomes than
if all their income was from one source.
A lone parent on income support with one child
should have been receiving £116.18 made up of: child benefit,
income support and child tax credit. A combination of deductions
from her income support and tax credits saw her with just £62.17
left to support her and her child. She was £22.46 worse of
than if she was getting all her income from benefits and none
from tax credits.
£12 for sanction,
£5.70 IS overpayment
£11 social fund repayment
£2.85 council tax
£22.46 for child tax credit overpayment.
Official error and writing off overpayments.
The rules around the writing-off of overpayments
resulting from Revenue error are complex. Tax credit overpayments
can only be written off on grounds of official error if claimants
can prove both that the error was the Revenue's AND that it was
reasonable for them to have thought their award was correct.
The current application of the test as outlined
in COP26 is resulting in the vast majority of claimants having
to repay overpayments that are caused by Revenue error.
A man was disputing the recovery of overpayments
for 2003-04 and 2004-05. He had different been sent many award
notices where both the award and the overpayment figures differed.
The figures varied up to £1,000 and the helpline gave him
varied explanations. He was really worried as despite the mess,
he was still being chased for the money.
A woman had been overpaid tax credits as a result
of her income being deleted from the computer. The helpline advised
that their information showed that she worked 40 hours a week
but had no income. She was told that although the deletion was
computer error, the client should have spotted the mistake and
would still have to pay the money.
A woman had been overpaid in 2003-04 when she
had received a lump sum of £1,500 into her bank account.
She had queried it at the time and told it was correct. However
although they acknowledge it was paid in error they continue to
ask for the money to be repaid.
A couple had been told that they had been overpaid
for 2004-05 and 2005-06. They had been recorded as in receipt
of income based Jobseeker's Allowance, instead of contribution
based JSA. Although the error was the Revenue's the claimant was
told that she should have noticed the slight discrepancy on her
award notice and known that the two types of JSA are very different
for tax credit purposes.
A couple had been overpaid tax credits as the
female partner had been recorded as in receipt of DLA instead
of their daughter. They were told they should have spotted this
error and would have to repay all the money. The mistake had been
made when they advised of an increase in their daughter's rate
of DLA. When their child tax credit payments increased they therefore
thought this was correct.
Claimants can spend much time and energy proving
that the error was the Revenue's, (ie getting phone records to
prove that they did advise of a change of circumstances or to
query the money received), only to be told they still have to
repay the money as it wasn't reasonable for them to have thought
their award or their payments were correct. Claimant's are expected
to check the details on their award notices.
Only a very small fraction of all disputed overpayments
are now written off (around 3% of the 303,000 disputed between
April 2006 and January 2007). This compares with around 45% of
all cases disputed in the earlier period. There is a deep feeling
of injustice in thiseven when the Revenue have made terrible
mistakes and messed the client around, they can still recover
all the money overpaid. We would like to see more overpayments
The reasonableness test means that the responsibility
for Revenue errors lies with the claimants. All overpayments are
automatically recovered unless challenged and even then however
bad the Revenue's mistake, the claimant still has to pay it back
unless they can prove it was reasonable for them to have thought
their award was correct.
We would like to see HMRC abandoning the reasonableness
test until they are able to routinely advise clients of the causes
of their overpayments. This would mean that the Revenue write
off all overpayments that arise from their own mistakes. This
would also provide them with incentives to reduce the number of
mistakes that they make.
The following changes are needed to improve
stability of income for tax credit claimants.
Delay recovery until 30 days after
the claimant has been notified of: the reason for the overpayment;
their right to dispute the recovery on the grounds of official
error or hardship; and/or their right to appeal. This would also
enable families to budget for the drop in income.
A statutory right of appeal to an
independent appeals tribunal must be introduced. This would build
confidence in the independence and equity of the decisions being
made. This would need legislative change.
Review of recovery methods to ensure
claimants do not have to repay two overpayments at once or overpayments
from both DWP and HMRC benefits.
Abandon the use of the reasonableness
test for deciding whether to write off overpayments arising from
Revenue error until HMRC can provide basic explanations of overpayments
and introduces a right of appeal against recovery on grounds of
3. Ongoing administrative and IT problems
Administrative problems continue to cause serious
payment problems for many of our clients. Getting them put right
can cause considerable stress as well as financial problems. One
bureau commented that their clients were "Living on edge
of poverty where any hiccup has major effect on family's ability
to manage financially. "
In December a couple sought help as they had
had no tax credits since they applied in August. The helpline
advised that the award had been decided but they were awaiting
a payment plan to be processed. There was no indication of when
this might be resolved or how long it had been waiting. They advised
that if they needed an emergency payment they would have to request
one from their local HMRC enquiry centre. After several calls
the bureaux managed to get the number of their local office but
could not get through on the phone.
Thousands of families still have to be paid
manually when their cases "fall off the system". The
Paymaster General's December statement advised that HMRC have
a new system for dealing with payments for these families; the
system will ensure that only part of their payments will have
to be paid manually. This new process was set up because the October
IT release resulted in increasing the number of claimants being
at risk of "falling off the system'. In the three months
before the October system release an average of 25,000 manual
payments were made each month. Since the release this has risen
to an average of 33,000. Claimants
with complex family and work situations can find it difficult
to understand the changes to their tax credit entitlement and
payments; receiving their payments both by giro and BACS payments
adds to complexity and is far from ideal.
One bureau had been helping a family with complex
tax credit problems for ten months. The family had been told that
they owed £5,000 but are owed £4,000. The technical
team at the Tax Credit Office have been involved as there seems
to be a problem with the case and the 2005-06 unresolved overpayment
is affecting their ongoing payments. The bureaux have described
the situation since February 2006 as one of "massive stress
[because] of [the] demand for overpayment, things always changing,
waiting and waiting for it all to be resolved, permanently being
disappointed. " The clients were having to receive their
payments manually via giro which carried with it the risk of further
overpayment when their case is put back on the system.
Claimants who receive manual payments are more
likely to experience problems getting other benefits such as Healthy
Start vouchers as their details will be missing on the data scan
sent to the Department of Health.
A couple with three year old twin girls, had
never received milk tokens (now Healthy Start vouchers) despite
making numerous requests to the tax office for them. The clients
had been told that because their CTC payments were made manually,
their details were not passed automatically to the Department
of Health in order for them to be supplied with the vouchers.
They were told that their payments were done manually due to a
High priority must be given to resolving IT
problems, thereby reducing the number of claimants having to receive
their tax credits manually.
Improving communications between child benefit
and tax credits IT systems would also help claimants. Bureaux
often advise that both overpayments and underpayments arise because
of mistakes around whether a child stays on in full-time non-advanced
education after sixteen. Mistakes are far less common with child
benefit, yet the entitlement rules similar. Claimants also struggle
to grasp the need to inform both child benefit and child tax credit
sections of HMRC and often assume that the departments communicate.
Getting it wrong can cause considerable stress.
In January a woman sought help from her bureau after she'd been
threatened with court action for ignoring overpayment letters
for debts of working and child tax credit totalling over £11,000.
This was despite the fact she'd discussed repayment options over
the phone and the first payment not being due for another two
weeks. With advice from the bureau they were able to establish
that she didn't owe the money anyway as her son had stayed on
in education, she had advised them of this, and had been entitled
to tax credits the whole time.
7 Hansard 7February C1037w, 22 February and 5 June
HMRC Child Tax Credit and Working Tax Credit. Take-up rates, 2004-05,
March 2007. Back
Hansard, 7 February 2007, Column 1037w and 22 February. Back