TAX CREDITS
1. The Department has overpaid £6 billion
in tax credits in the first three years of the scheme. By
the end of March 2007 the Department had collected £2
billion, written off £0.7 billion and made provisions for
a further £1.6 billion of overpayments it is unlikely to
recover. Overpayments currently affect 1.9 million families a
year, significantly greater than the estimate of 750,000 when
the scheme was designed. The policy changes to reduce overpayments
included in the 2005 Pre-Budget Report have yet to take full effect.
The Department should report on their actual cost and effect in
terms which show whether they meet their objective of reducing
overpayments by one third.
2. Claimants may not understand why they have
to make repayments, especially where they find themselves owing
money to the Department where they were not previously in debt.
Some regret ever getting involved with
the scheme. The Department is looking to introduce more flexibility
into the system to allow it to deal with certain categories of
claimant more effectively. It needs to explain clearly in its
award notices how the scheme works and how overpayments may arise.
3. The Department has yet to succeed in clarifying
its procedures for recovering overpayments.
The Department has not sought to recover overpayments where it
has made a mistake and the claimant could reasonably have thought
the payment was right, but has had to make difficult judgements
about what claimants could be expected to know. In 2006-07, 371,000
households disputed the recovery of overpayments, of which some
10,000 resulted in write-off. The Department needs to devise and
implement a more objective test for assessing when tax credits
claimants could reasonably have known they were overpaid.
4. The Department has made a series of changes
to the tax credits computer system, but software errors continue
to affect some payments and it still has to fallback on manually
processing certain awards. The Department
accepts that the computer system is fragile which makes it very
difficult to improve processing. The Department needs to strengthen
its computer systems to make them more capable of supporting desired
changes to processing.
5. In 2006-07 the
Ombudsman reviewed 393 complaints about tax credits, of which
74% were fully upheld or partially upheld. The proportion
of complaints upheld on tax credits is higher than for any other
department investigated by the Ombudsman. It is unsatisfactory
that so many people have to pursue their complaint through the
Ombudsman, having exhausted the Department's own complaints procedures.
The Department needs to determine why such a high proportion of
complaints to the Ombudsman are upheld and reassess its own procedures.
6. Levels of claimant error and fraud remain
unacceptably high, and the Department is still losing £1
billion each year. The Department has
accepted the Committee's previous recommendations on the need
to set targets for reducing error and fraud, but says it cannot
set a target until 2008 when it will hold two years of good data.
The Department should not have taken five years to get these targets
in place. When setting these targets, it should also determine
the additional resources required to achieve the target reduction
in error and fraud.
7. The Department accepts changes in income
and circumstances notified to it by claimants, so erroneous or
fraudulent disclosures may only be detected by post payment checking
and may go undetected altogether. The
Department needs to assess in detail the risks of claimant error
and fraud and establish whether the responses it currently has
in place are sufficient to achieve its target reduction in error
and fraud.
THE DEPARTMENT'S SETTLEMENT WITH
EDS
8. In settling its claim against its contractor
EDS for the problems encountered in implementing the tax credit
system, the Department agreed that £26.5 million of the settlement
could be paid in instalments reflecting new government business
won by EDS. The Department
has recovered little of the £26.5 million and may not obtain
payment of full settlement by the end of 2008. We have previously
criticised the invidious arrangement that requires the Government
to commission further work from the contractor in order to recover
compensation for underperformance. The Department needs to work
with EDS to accelerate the rate of payments, and should consider
litigation if the full amount of the settlement is not forthcoming
in 2008.
THE TAXATION OF SMALL PENSIONS
9. The Department is failing to collect an
estimated £135 million income tax on certain small pensions
each year because of incorrect guidance and failures by local
HMRC offices to implement agreed procedures.
The Department's steps to regularise this position mean that some
pensioners will have an additional and unexpected tax liability
notified to them in 2008-09. The Department needs to alert pensioners
to the possibility that their tax liability may change and provide
them with longer periods of time to settle any additional tax
liability that would affect their ability to pay.
