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22 Oct 2008 : Column 131WH—continued
It is not my practice to raise such issues in Adjournment debates, particularly with a kind and generous person such as my right hon. Friend the Minister. I would
rather deal with them by bringing them to the attention of the appropriate Department. However, that is what I have been doing. Over and over again, my colleagues and I have raised the issue with the Department. Indeed, the Department now has the benefit of an ombudsman’s report saying that what is happening is wrong, but nothing has been done and no remedy has been found.
I have asked how many households are affected by the issue. I know that my right hon. Friend will not yet have had the chance to answer, as my question was perfected only earlier this week, but so far that information has not been forthcoming. We may be able to find out more about how many families are subject to this draconian measure requiring repayment when they fail to fill in the forms. In the absence of statistical data, all I can say is that the empirical evidence suggests that the issue is not insignificant. It affects certainly hundreds and perhaps thousands of families, and the support for my early-day motion suggests that it is widespread.
I shall explain a little about how the problem arises. A family receiving child tax credit continues to receive the benefit after the end of the year for which it is awarded. There is a case for paying retrospectively—that would be a better system, if it could be devised—but that is not how it works. In order to finalise an award, the applicant is required to complete a record of income for the past year not later than 31 July of the following year. That may seem straightforward and perfectly reasonable; indeed, the Department requires the perfected information in order to finalise the award for the current year as well as the previous year. However, sometimes, for exceptional reasons—or, I dare say, sometimes out of ignorance or gross failure—the forms are not returned in time. Sometimes it is alleged that the forms have been returned, but the Revenue denies receipt. Who knows? I do know, however, that the draconian policy in such situations causes harm.
In such situations, not only does the current payment cease but all payments made during the current year before that cessation are recoverable in full, even if it is deemed subsequently that the award was fully valid. In short, families are being asked to pay, out of no income or a reduced income, an award to which they were entitled, and are thus being plunged into poverty. That cannot be right.
To give an example, one of my constituents has five children, two of whom are severely disabled. Although her husband works, they live on a very low income. They failed to finalise their award within the time scale allowed for by HM Revenue and Customs and were notified by letter that they would need to do so. My constituent says that she then sent off the relevant details. There is proof that the tax credit office received the letter, but it did not contain all the information needed to finalise the claim. My constituent says that they wrote again, but heard nothing further.
Some time later, her tax credits stopped altogether, at which point she contacted the tax credit office and was told to reapply, which she did. That was fine—she filed a new claim and started receiving money from November of that year—but all the money that she had received from April to November, even though her income had not changed, was repayable. It came to more than £5,000. The family could ill afford it; in fact, they simply cannot afford it. They have been plunged into
poverty as a result of that failure on her part. Whether or not it is her fault, that is simply wrong.
That family, with all its problems, was plunged into poverty. Perhaps my constituent should have been more careful to ensure that the information that she sent was complete, or sent the documentation by recorded delivery to be sure, but the fact is that the average recipient family are not solicitors of the Supreme Court or Ministers of the Crown. They act in normal ways. They get things wrong. Life is hard. To punish them for what is either no fault of their own or simple ignorance is just not right.
In another case, a man with three children suffered serious mental health problems that prevented him from dealing with his affairs during the months when his annual return should have been made. As a consequence, the deadline passed and he and his family were required to repay more than £4,000, the moneys received during the first nine months of the year. The Minister may well tell me that HMRC has discretion to accept exceptional reasons for failing to submit an annual declaration on time. How often is such discretion exercised? The case worker in my office, Andrea Samuelson, who deals with such matters has made it clear to me that discretion has never been exercised in any case that we have dealt with. It is as bad as that, and the experience of the colleagues to whom I have spoken is much the same.
The ombudsman’s 2007 report criticises that failure to exercise discretion, saying that continuing to deny reinstatement would
“be far too harsh a penalty for the delay, work entirely against the policy objectives of the scheme and unnecessarily cause customers avoidable distress and hardship.”
In the particular case that I mentioned, HMRC says that it is unprepared to exercise discretion, as the man’s wife was capable of dealing with the paperwork. That may be true, but at the time she was supporting the family and, as her husband had always dealt with household money issues, she did not act on the letters received.
I fully appreciate why awards need to be finalised and that, for reasons of efficiency, a cut-off date is necessary. If accurate information regarding income is not received in good time, there is clearly a risk that the wrong payments will be made and an overpayment will occur. Of course, I acknowledge that if someone is not entitled to a payment received, they should be asked to repay it, but that is not the issue. I am talking about people who are entitled to the payments that they receive, but who through administrative failure, on their part or the part of others, are penalised in the way that I have described. To plunge deliberately such families into poverty is not just an administrative failing, but something of which we should be ashamed.
The Financial Secretary to the Treasury (Mr. Stephen Timms): I am listening with great interest to my hon. Friend’s compelling case. Is he arguing that if someone forgets to complete their renewal form, there should be no penalty or a smaller penalty? Where should that be set?
Michael Jabez Foster:
I am not suggesting that there should be no penalty for a failure to complete a return on time. The Tax Credit Act 2002 provides for the ability to fine or impose penalties for late returns. Indeed, under income tax legislation, late returns result
in a penalty—£100 or £200, I think—which is absolutely right. However, late income tax returns, for example, do not result in the draconian measures such as those arising from late tax credits forms. Late income tax returns do not deny the opportunity for a tax rebate, which still follows when the application is submitted, however late—up to six years, I believe, which is very generous. Those applications are dealt with according to the facts and on merit.
I can think of no other part of the tax system that imposes penalties as draconian as the loss of one’s entire benefit, as does the tax credit system. Given its purpose, the ombudsman is quite right when she said that to deny reinstatement causes
“far too harsh a penalty for the delay, works entirely against the policy objectives of the scheme and unnecessarily causes customers avoidable distress and hardship”.
I would like the whole system to be simplified and, indeed—this perhaps is not quite possible—credits to be paid retrospectively. The number of families who do not make a claim through fear of overpayments is becoming more and more significant and certainly does not aid our common cause of reducing child poverty.
My proposal is simple: where a tax credit claim is terminated following a failure to finalise an award, there should be an independent appeals system whereby, if the claimant can prove their entitlement for that year at a later date, that which constitutes a genuine overpayment should be recovered, although perhaps with some penalty akin to the income tax arrangements. I am not suggesting that there should not be a penalty, but that the current one is disproportionate. We expect more of sometimes vulnerable families than of any other group in the tax system. We do not exercise that sort of draconian power against income or company tax payers or against those who fail to make their VAT returns on time. It is wholly disproportionate, and I want the Government to deal with it now. They have had long enough. There is no excuse or moral or legal reason it should not happen immediately.
4.43 pm
The Financial Secretary to the Treasury (Mr. Stephen Timms): I congratulate my hon. Friend the Member for Hastings and Rye (Michael Jabez Foster) on securing this debate and on the customarily clear and cogent way in which he put his case. He was generous in his praise for tax credits, and I think that he is right to point out how many people benefit from them: more than 11,000 families and nearly 19,000 children in his constituency, as of April. They have done a very effective job in helping people into work and to move up the employment ladder. I heard his case for a more backward-looking system, which would indeed simplify the computation of allowable tax credits. The problem with that is that the system would become much less flexible. At the moment, one of the strengths of the system is that if, for example, someone suffers a fall in income during a financial year, the system can respond quite quickly. If it just looked at the previous year’s income, that would not be possible. However, I understand his case.
Michael Jabez Foster:
The most popular payment introduced by this Government is the winter fuel payment, because poor people benefit from large lumps of money. They do not spend their money weekly. Obviously they
need the basic income and income support, or whatever, to get them through the week, but it is things such as the cost of shoes, fuel bills and other big payments that they need help with. Lumps of money from time to time aid poor people enormously—they seem to manage day to day on anything, but big retrospective payments would be a benefit, not a disadvantage.
Mr. Timms: I agree with my hon. Friend on the popularity of winter fuel payments, although tax credits are pretty popular too: take-up is very high. I understand the concern that some may have about not applying for tax credits because of the worry about overpayments, but actually, in 2005-06, take-up of the child tax credit was 82 per cent., with more than 90 per cent. of the money available being claimed. Take-up among those with incomes of less than £10,000 a year is now 96 per cent., up from 93 per cent. in the first year of tax credits. Those figures are encouraging and partly reflect the fact that the service has become considerably better since the initial problems, which undoubtedly there were—I readily acknowledge that there were serious problems in the early days, but there have been considerable improvements since. In many respects, Her Majesty’s Revenue and Customs is now providing a good service, although I entirely accept that there is room for further improvement. I am determined to ensure that we do improve it further, as I have made clear during my couple of weeks in my current role so far. We are certainly seeing fewer overpayments caused by IT or administrative error, and accuracy in processing and calculating awards has risen substantially. I very much hope that through the tax credits transformation programme, which started in 2006, we will see substantial further improvements still.
My hon. Friend made a number of very important points about overpayments. End-year adjustments leading to an overpayment fell significantly in 2006-07 to £1 billion, as a result of the successful implementation of a package of measures to improve tax credits administration announced at the 2005 pre-Budget report. They are now less than half the level of the first year of the system and constitute just 5 per cent. of gross spending on tax credits, which is better than we projected in the 2005 pre-Budget report when we anticipated that overpayments would fall by about a third—in fact the fall has been about 40 per cent.
The number of families affected by overpayments is down significantly from 1.9 million to 1.3 million, and the average overpayment is down. But I agree that that is no grounds for complacency, so in May we published “Tax Credits: improving delivery and choice”, which was a discussion paper showing the Government’s commitment to ensuring that the system is working for families. It explored proposals to improve choice and certainty for tax credits customers, as part of a strategy of encouraging customers to take more control of their tax credits awards. My hon. Friend argued for simplicity. One of the themes of the document, particularly on support for child care, was about how the system could be simplified while still meeting its objectives. We received very good input to that exercise from advice organisations, and this debate gives me the chance to put on the record my thanks to those organisations for the effort that they put into responding to that consultation.
HMRC’s policy on recovering overpayments is set out in its code of practice 26—“What happens if we have paid you too much tax credit?”—which was significantly amended at the start of this year. Previously the policy was that an overpayment was written off if there was an official error and it was reasonable for the customer to believe that their award was correct. The reasonable belief test caused a good deal of concern particularly because people’s perception of what is “reasonable” can vary widely. My hon. Friend has raised a number of issues about that since the introduction of the system.
At the end of January, we replaced the belief test in code of practice 26 with a clearer test setting out the responsibilities of HMRC and customers to check factual information. In effect, that is a contract of responsibility. It builds on the existing practice of giving people responsibility for checking the factual information. HMRC plays back to them in the award notice information such as how many children they have and what their income is. People are expected to check that that information is correct and that the amount that goes into their bank account matches the award notice. There is no expectation that people will know the formula and I sympathise with the points that my hon. Friend made about that. As before, they will not be expected to check the calculation. However, if there is an official error and customers meet their responsibilities, the overpayment should be written off.
The new code of practice goes further. HMRC now has a time limit of 30 days to process reported changes of circumstances. In addition, where HMRC makes an error any overpayment will be remitted if the customer reports the error within 30 days of receiving the award notice. HMRC will also remit all overpayments arising following a report from a customer of an error by HMRC. The changes will create a fairer balance of responsibilities between individuals and HMRC. I hope that that will allow us to make significant progress in bearing down on the scale of the problems caused by overpayments.
The early-day motion put down by my hon. Friend aimed to question the way in which HMRC recovers overpayments when a customer has not renewed their application. I will give some background on this issue. Tax credits are claimed annually. The renewals process serves two purposes. First, it finalises the award for the previous year. Secondly, as he said, it acts as a claim for the current year. While the claim is being renewed, HMRC will pay provisional payments based on the previous year. In the absence of a claim, the award is ended and provisional payments become repayable.
My hon. Friend believes that overpayments should not be recovered when the person has failed to make a claim in time but would have been eligible had they done so. There is a problem with that, which was the reason for my intervention. There are deadlines for good reasons and I do not think that anyone, including my hon. Friend, can say that those do not matter. The longer that families are on provisional payments the more likely they are to have their current award based on out-of-date information. We have shortened the deadline by two months. As a result, just after the end of July this year around 2 million fewer people were on provisional payments than three years ago. That has helped.
HMRC must put out a strong message that deadlines are important and that people must get the information in on time. HMRC makes every effort to get people to renew on time, including an extensive campaign of radio and television advertising. As part of the tax credits transformation programme that I mentioned, HMRC has proactively contacted 85,000 of the most vulnerable customers either early on in the renewal process or if they had not renewed by the deadline. HMRC offered help by renewing awards immediately over the phone where possible or, if they had already been renewed, checking that the renewal had been processed to encourage timely renewal in the following year. As a result of that exercise, more than 10,000 claims were renewed immediately over the phone and more than 20,000 claimants agreed to call back on a special number. More than 20,000 claims had already been renewed by the time HMRC had spoken to the claimants. Those figures indicate that that was a worthwhile exercise in ensuring that people got the information in.
If someone misses the end of July deadline, their payments will be stopped shortly afterwards. After that, HMRC allows customers 30 days to restore their award without any quibble. They can be allowed longer if they can demonstrate a good cause for their not renewing by the deadline. My hon. Friend asked how often that discretion has been exercised. Unfortunately I am not able to give that figure, although I understand the point that he has made. I can tell him that for this year’s renewals round overall, HMRC has restored nearly 200,000 awards to date. I am not able to say how many of those were on the good cause basis, but nevertheless, a lot of rewards have been restored.
It was interesting to hear the two examples that my hon. Friend referred to in his speech. I have not seen the details of those cases before. If he passes the details to me, it would be interesting to look at whether the good cause basis should have applied in either case. I would be happy to check that.
If someone has not restored their award and they make a new claim, that can be backdated by up to three months. HMRC has no interest in forcing people into hardship. We want to strike the right balance between a payment plan that can be met without undue hardship and the recovery of overpayments. There are well established processes in place to do that, including for those whose awards have been terminated, using 12-month instalment plans with longer repayment periods where necessary. The code of practice on recovering overpayments makes it clear that exceptional circumstances will be taken into account.
Michael Jabez Foster:
My right hon. Friend talks about the good cause basis. The section on the definition
of good cause on the website states that more internal guidance on what constitutes a good cause exists. However, the Library tells me that it is protected by the Freedom of Information Act 2000 so it is not actually available. I am not talking about overpayments, but about people who would have been entitled to tax credits had they filled in the form. In his last moments, will he say why income tax payers are not dealt with in the same draconian way? Is it because there are more of them?
Mr. Timms: My hon. Friend is right to continue to press me on that point. I am well aware of the strength of feeling shown by those who have signed the early-day motion and in other representations that have been made. The issue that he raises on the impact of the policy is similar to a separate issue that has been raised with me about notional entitlement. I do not know if he has come across that. It is similar in that there is a change of circumstances and people’s tax credits change, but they do not notify anybody of that change of circumstances. That has been raised by the advisory group that works with us on this matter. I am looking at that and I will look at the matter that my hon. Friend has raised as I do so.
It is important that we underline the need for people to complete the forms and respond promptly. If they do not, great difficulty is caused to HMRC and in due course to the individuals themselves.
In my last couple minutes, I will pick up on a couple of other points that my hon. Friend made. There is already an appeals process. If people think that their entitlement is wrong, they can appeal to the tribunals service, which is independent. There is no statutory right of appeal against a decision to recover an overpayment where there is no argument about the level of entitlement. However, HMRC suspends recovery of an overpayment when a customer disputes an overpayment or appeals against the decision that identified an overpayment. When a customer is unhappy with the decision of HMRC to seek recovery of an overpayment, they can ask the adjudicator or the ombudsman, who are both independent, to review it.
I will look at the point that my hon. Friend has just made about the Freedom of Information Act. That is a new one on me. If he sends me the details of the two cases, I will ensure that they are checked to see whether the good cause discretion should have been exercised.
The sitting having continued for two and a half hours after half-past Two o’clock, it was adjourned without Question put.
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