Select Committee on Treasury Written Evidence

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 same.

  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[7] 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 recovery.

    —  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 into debt.

  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[8]. 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 this timeframe.

  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 overpayment.

    —  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 or re-budget.

    —  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 income—the 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 versa.

  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 months.

  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.

    Income: £116.18


    £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 this—even 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 written off.

  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 official error.

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. [9]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 "system fault".

  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.

March 2007

7   Hansard 7February C1037w, 22 February and 5 June C189w. Back

8   HMRC Child Tax Credit and Working Tax Credit. Take-up rates, 2004-05, March 2007. Back

9   Hansard, 7 February 2007, Column 1037w and 22 February. Back

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