Letter from Chairman, HM Revenue and Customs
to Committee Chairman
TAX CREDIT
ADMINISTRATION
I thought it would be helpful, prior to my appearance
before the Committee on 10 October, if I provided some further
background to the review by HMRC of some older tax credits awards
that the Financial Secretary referred to in her statement to the
House of 25 July (copy attached).
Tax credits work on an annual cycle. The initial
award at the start of the year is based on a family's latest known
circumstances and is calculated on the income they received in
the previous tax year. At the end of the tax year, during the
renewals process, HMRC seek confirmation of the actual income
and the family's circumstances. Based on that information, they
issue a final award for the tax year just ceased. For the purposes
of this note, I will refer to this as a section 18 decision in
acknowledgement to the relevant section in the Tax Credits Act
2002.
Parliament wanted to provide finality and certainty
to customers and the Act sets out the circumstances and manner
in which a section 18 decision can be re-opened. As the Financial
Secretary's statement confirms, officials did not follow the correct
procedures when reopening some of these cases.
Although the revised award was an accurate reflection
of the households' new circumstances, the process by which HMRC
took new information into account was not correctly followed in
all cases. HMRC should have notified recipients in writing at
the time,that it was examining the award after finalisation, using
our powers under sections 19, 20 or 21 of the Tax Credits Act,
but did not do so in certain cases.
I have outlined below a couple of examples with
some of the common reasons for re-opening a finalised award that
we have seen in practice.
(i) A customer tells HMRC that their income
for the preceding year was £1,800. HMRC finalises the award
(make a section 18 decision) on that basis, the customer does
not appeal and gets a large lump sum payment in respect of arrears.
After the customer has returned their annual renewals pack, confirming
that the details of their circumstances were correct, the customer
gets in touch to say the family's income figure should be £18,000.
What HMRC have done is amend the records without
opening an enquiry and re-finalised the award, creating and seeking
to collect back the overpayment. This is the right amount in terms
of the money the claimant should actually end up with, but our
actions to achieve that result were wrong. The error arose because
HMRC failed to notify the claimant in writing at the time.
(ii) In another example, when finalising
their 2006-07 award, the customer gets in touch to say they have
just realised they had never told us that one of their three children
left school in July 2005. They forgot to put this information
when returning their annual renewals pack in May 2006 when they
were finalising 2005-06.
What HMRC have done is amend the records and
re-finalised the award.
What HMRC should have done is open a section
19 enquiry within the period beginning immediately after the award
is finalised and ending one year after the reply date of their
annual review notice, (or made a section 20 adjustment within
five years of the award year end) under the Tax Credits Act 2002
to correct the award and recover the overpaid money. It should
also have notified the claimant in writing of its action. HMRC
will now need to review the case, either within section 19 or
section 20, to confirm the award, and correctly keep the overpayment
we have recovered.
It might help if I explain how the problem came
to light. From spring 2006, a small number of cases came to the
attention of our technical team which had been re-opened after
finalisation without the necessary legislative steps being followed.
Examples of the incorrect procedures were found in a few appeal
and complaint cases, and the conclusion drawn at the time was
that the problem was small-scale and localised. In each case,
the technical team gave advice on how the case should be correctly
handled.
Part of the remit of the technical team is to
monitor information from operational staff and claims that are
referred to them and take a view of how policy and legislation
are working in operational practice, in this instance a small
number of cases continued to emerge over the summer. Therefore
guidance to staff was strengthened to emphasise the correct processes
that should be followed if a finalised award needed to be re-opened.
In addition, training sessions were held between September and
November with staff from a range of tax credits operational areas,
Feedback from these sessions indicated that a number of staff
were unclear or uncertain about the correct procedures.
We analysed this feedback, which suggested that
the problem could have been more widespread than first thought,
and, in early 2007, steps were taken to gauge the scope of the
issue. This was a major task with a population of six million
families who reported just over seven million changes in circumstances
in 2006-07. In addition, many of the cases re-opened after a section
18 awards, had been handled following the correct procedures.
We also took legal advice on the status of the
actions that had been taken. By July 2007 we had firm legal advice
from Counsel. We were then in a position to provide full advice
to the Financial Secretary in July. The Financial Secretary thought
it appropriate to bring the issue immediately to the attention
of the House. This she did through her statement of 25 July and
in an individual letter sent to all Members. HMRC also notified
the Chairman of the Committee of Public Accounts and the National
Audit Office at the time; and have kept the voluntary organisations
informed.
We informed the NAO of this issue in July 2007
once we had received firm legal advice from Counsel. We have subsequently
provided various background papers to the NAO and they have met
with HMRC officials to discuss the nature and implications of
this issue. We will continue to keep them updated on our work
in this area.
We have now finalised the mechanics of the review.
We are anticipating that HMRC will incur administrative costs
of around £10 million to complete the review. In addition
to these there will be the cost of handling any additional appeals
or complaints which we are not yet in a position to assess.
I can give my assurance that the vast majority
of those affected by this issue will not see any impact on their
tax credit award and no one will be worse off. However HMRC expect
that around 20,000 households may receive a repayment to the total
value of around £20 million. Those cases will date from 2003-04
or 2004-05, where the amendment to the award was made to correct
an error made by HMRC, rather than new information from the customer.
An example of such a case is:
a claimant told HMRC that their income for 2004-05
was £20,000. When HMRC were inputting income, details of
£2,000 were inadvertently entered and the section 18 decision
is made on that basis. After the award was finalised, HMRC are
contacted by the claimant alerting them of the error.
HMRC amended the records and re-finalised the
award, and sought to collect the overpayment without opening a
s19 enquiry.
When this case is reviewed HMRC will not be
able to open a section 19 enquiry as they are outside the time
limits and Section 20 cannot be applied as the error was made
by HMRC and did not result from any negligence on the claimant's
part. Hence this case cannot be put on a correct legal footing
and the overpayment that has been collected will be repaid to
the claimant.
If a customer's tax credit award is being reviewed
as part of this exercise they will have been sent a letter from
HMRC. Unless individuals receive a letter, they have not been
affected by this issue.
HMRC is about to start the planned programme
of work to review the tax credit awards that may be affected.
It will be completed in three years. The time span reflects the
need to put these cases on a sound footing as soon as practicable,
whilst ensuring that HMRC continues to improve the service it
provides to tax credit claimants. The plans include ensuring that
those cases where the overpayment is greatest will be reviewed
first, and priority will also be given to those where there is
an outstanding query about the overpayment.
Since the Financial Secretary's written statement
HMRC have done further work to refine their initial estimates
of the number of affected cases. Although the total number affected
has not changed, HMRC now estimate that as a result of this issue
around 100,000 cases relating to 2003-04 will be need to reviewed
and 75,000 cases relating to 2004-04 and 75,000 cases relating
to 2005-06 awards. Revised procedures have now been put in place
and no awards for future years will be impacted by this issue.
This should be seen in the context of the six million households
that are benefiting from tax credits.
3 October 2007
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