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The Government accepted all recommendations in the report and is taking action to implement them. A key improvement is the revision of COP 26 to better reflect the balance of responsibilities on both tax credit claimants and HMRC.
It is clear from the complaints received that attempts by HMRC to recover overpayments made under the tax credit system continue to cause distress and hardship for a significant number of people. As one complainant put it: Tax credits are supposed to help families, not cause them money worries.
I would like to give two examples from my own constituency in which I believe that, regardless of what the Government have said about code of practice 26 and the application of the overpayment system, HMRC
has deliberately ignored at least five of the ombudsmans six recommendations. I remind the Minister of the last recommendation:
In considering the recovery of tax credit overpayments, the Debt Management and Banking Unit should be required to tailor their approach to the needs of the customer group. In the case of tax credit recipients, that would include considering family circumstances (such as whether they include children or adults with disabilities or severe illness) and the likely impact on the individual or family. That consideration should also include whether recovery, either immediate or suspended, would work against the policy objectives of the tax credit scheme.
I believe that that recommendation is pertinent to what I want to say about my two cases and to what the Department has been doing since on the number of cases that have been allowed and the number of people taken to court in at least the past eight months.
My first case is that of Mr. and Mrs. F, an elderly couple who look after their granddaughter. Having made an application for tax credits just over two and a half years ago, they were receiving £136, which later increased to £400. They were told that that increase occurred because the Department had recorded that their granddaughter was severely disabled, but she was not. Regardless of the fact that it was Mr. F who informed the tax office of the mistake, he was asked to repay £4,823 of the overpayment. That caused him unbearable stress: he is 76 and subsequently suffered a heart attack.
Mr. F then tried to gain access to his phone records in relation to the tax credit form and the claim form in which he was supposed to have stated that his granddaughter was severely disabled. That request was denied, which is a clear contravention of the recommendations of the ombudsmans report. After Mr. F contacted my office, we were able to get that information for him. HMRC agreed that he had not claimed that his granddaughter was severely disabled, the claim for £4,823 was dropped and he received £150 in compensation. He first raised the issue with HMRC in January 2007, and only this month was the problem sorted out, so such cases are happening now, regardless of the ombudsmans recommendations.
My second case is that of Mrs. M. It is an example of an attempt to claw back working tax credit, despite the fact that Mrs. M had kept the tax credit office abreast of all the circumstances and recorded her correspondence. The tax office claimed that she had been overpaid for child care, despite the fact that she had called the tax credit office to inform it of her child care circumstances. At that stage, the tax credit office was attempting to claim back £2,600, even though she had always kept the Department informed of what was going on.
The Department then admitted that a computer glitch had caused Mrs. Ms record to show that she had received over three times as much working tax credit as she had in fact received. Consequently, she had been underpaid by £126.76, and in the two years during which she had pursed the claim her entitlement had been reduced by £1,625.96, which she is now owed. Again, that case took nearly three years to resolve, and that lady is working on the minimum wage. She is being threatened with court action, despite keeping all the information, which is why I believe that code of practice 26 and the recommendations on what the Department should do when things go wrong are being applied in name only.
The number of times that HMRC has used a court case to claw back overpayments has increased massively: between April and October 2008, 5,697 people were taken to court for overpayment, which is a 500 per cent. increase on the previous figure. I put it to the Minister that, with regard to the application of code of practice 26 in the tax credit system, the issues raised in the report do not seem to have been taken on board, which is shown by the fact that people are still being pursued in the way I have described.
In 2005, 351,500 people disputed overpayments with the Department and 162,500 were written off. In 2006, 350,000 people complained, so that figure was roughly the same, and 14,000 were written off. In 2007, 202,000 complained and only 12,350 were written off. That says to me that HMRC, rather than putting in place the ombudsmans recommendations, is taking a much harder line and penalising people through a system that was designed to help them and is, in my view, not doing so.
These decisions effectively place those low income families and earners in debt, and in many cases will have a financial impact on them for years to come, often causing them hardship and anxiety.
I believe that that is the case: a system that was designed to help people is, by its application, continuing to cause huge distress and anxiety. I hope that the Minister will take that on board and ensure fully that those recommendations are implemented so that the principles in the report are applied. I hope, too, that that will sometimes include an acceptance that the Department is at fault, rather than the individual.
Mr. David Gauke (South-West Hertfordshire) (Con): It is a pleasure to serve under your chairmanship once again, Mr. Weir. I begin by congratulating the hon. Member for Regent's Park and Kensington, North (Ms Buck) on not only securing the debate, but setting out her case so well. In a clear, thoughtful and analytical speech, she identified many of the difficulties facing working families with children and the poverty trap that exists for such families, particularly in Londonshe is a London MPwhich is a high-cost area. I will focus the bulk of my remarks on the points that she made, particularly those that relate to the child care element of working tax credit. However, the title of this debate refers to tax credits generally, and this is the first Westminster Hall debate that we have had on the subject for a while.
The hon. Members for Caernarfon (Hywel Williams) and for Rochdale (Paul Rowen) rightly raised broader issues and difficulties with the tax credit system, particularly problems caused by overpayments. That is a long-standing issue; as the hon. Member for Rochdale pointed out, the parliamentary ombudsman has been involved, and he could have mentioned that the National Audit Office considers it regularly. There are continuing difficulties with overpayment. I do not think that any of us is under any illusion about the difficulties that overpayments can
create, often through no fault of the recipients, who find to their surprise that they are required to pay back amounts that are substantial given their income.
The problem is one that we as Members of Parliament face in our constituencies and address in such debates fairly regularly. I am sure that the Minister will explain what the Government are doing to address itI have no doubt that he will discuss reforms of code of practice 26, which was mentioned by the hon. Member for Rochdalebut the problem has not gone away, and it is right that we should acknowledge that.
We in the Conservative party take a slightly different view from that of the Liberal Democrats. If we are elected in the next general election, we will not abolish tax credits, despite the claims made by some MinistersI am sure that the Financial Secretary will not fall into that trapbut we recognise the need for fairly substantial reforms in the administration of tax credits to address the concerns that have been outlined in this debate and on other occasions.
The hon. Member for Caernarfon made a point about take-up. Generally, the take-up of child tax credits is pretty highthe Government are proud of that recordbut working tax credits tend to be more of an issue. He gave statistics for the take-up of working tax credits; it is around 40 per cent. However, there is an issue with working tax credits in households with no children. Historically, take-up figures have been low; a couple of years ago the take-up was 26 per cent. or so. I can remember the Prime Minister saying when he was Chancellor that the take-up would increase substantially. Will the Minister outline what progress has been made on that front?
The hon. Member for Regents Park and Kensington, North raised the issue of child care and the child care tax credit. Child care is hugely important. We want to get people back into work and encourage social mobility, but inadequate child care can hold people back. My hon. Friend the Member for Basingstoke (Mrs. Miller), who has great expertise on the subject, said that one in five women have difficulty finding affordable child care. Other figures compiled by the Daycare Trust state that the problem is particularly acute for those on lower earnings. Of those who earn less than £10,000 a year, 34 per cent. find child care unaffordable.
The quality of child care is also an issue. According to my hon. Friend, the number of failing child care settings in the poorest 5 per cent. of areas in England has increased from 6.6 to 10 per cent., which is worrying. Also, as she said, more child care facilities are being closed. Indeed, I believe that, last year, more places were closed than opened. Child care is a live issue, and not an entirely successful one, I am afraid.
On the child care element of the working tax credit, the system is complicated, as we have heard from the hon. Member for Regents Park and Kensington, North. Those eligible cannot spend the money on informal child care, as the hon. Member for Caernarfon pointed out. That is particularly relevant for low-income households. Research by the Institute for Public Policy Research states that, whereas 52 per cent. of families with a yearly income above £32,000 use formal child care, the figure falls to 31 per cent. for those earning £10,000. It appears that those on lower earnings are more likely to use informal child care, the very sort with which the child care element of working tax credit cannot assist.
As a consequence of the problems of complexity and eligibility, take-up is low. The figures given by the hon. Member for Regents Park and Kensington, North were striking and suggest that it is very low. Can the Minister give precise figures on the national picture? As far as I can see, the precise percentage of those on working tax credit who claim the child care element is not easy to find, because some do not have children, but Policy Exchange estimates it to be 26 per cent. of the 1.65 million families claiming working tax credit. That figure is pretty low, and it suggests that we have a problem. As the hon. Lady said, the child care element of working tax credit is not working. There is clearly a need to make it simpler and much more user-friendly. Surely, we can improve how we do it.
As far as I can see, there is also an issue with lower-income couples where both parents work. There is evidence to suggest that take-up is particularly low in that group, which may explain why fewer mothers from two-parent households appear to be in work nowadays. Whereas there has been an increase in the number of lone parents workingalthough not as great an increase as the Government might hopethe number of working mothers from two-parent households appears to be decreasing. If I am wrong, I am sure that the Minister will correct me, for which I would be grateful.
In the context of support for families with children and tax credits, the couple penalty within the tax credit system has not been mentioned specifically by those who have contributed to the debate. We all know that family breakdown is a great problem faced by society and that children who suffer a family breakdown are more likely to fail at school and have drug and alcohol problems; we have evidence. I pay tribute to my right hon. Friend the Member for Chingford and Woodford Green (Mr. Duncan Smith) for the enormous amount of work that he has done on the subject with the Centre for Social Justice. A considerable amount of research suggests that children benefit from having two parents. That is not a moral judgment but a purely pragmatic one. It seems a justifiable public policy objective to do what we can to prevent family breakdowns and keep couples together.
One of the difficulties that has emerged in recent years with the tax credit system is that it penalises the formation of couples. Indeed, there was a report by the Civitas think-tank earlier this month that showed that some parents can be more than 20 per cent. worse off if they live together rather than separately. That has a number of implications, one of which is that a degree of fraud appears to have been created, with some parents claiming to live separately when in fact they live together. The Institute for Fiscal Studies has put together some research on this subject and showed that about 200,000 more people received benefits and tax credits as lone parents than there are lone parents in the country, so that is an issue.
Ms Buck: The hon. Gentleman makes an important point. However, when people address the couple penalty, there is often an assumption that one member of the couple is able both to access and pay for their housing costs. Is that factor not usually taken into consideration when the couple penalty calculation is made?
As I understand it, the basis for that calculation is the income that needs to be achieved to live above the level of poverty. Regarding the benefits
that lone parents receive, there is an assumption that it is much easier as a couple to live relatively comfortably. I do not think that the arguments made by a number of groups that people are worse off living alone are correct. Indeed, there are case studies that basically show that some couples would do better living separately than together. There is some empirical evidence to suggest that that is the case.
There is an issue with the couple penalty, and we think that it needs to be addressed. I should be grateful for the Ministers view on this matter. Is any consideration being given to addressing the couple penalty? Addressing it would not only take about 300,000 children out of child poverty, but indicate to people that living together will not be penalised, that there is an encouragement of family stability and that we are seeking to address the real concerns that exist about family breakdown.
We have had a useful and interesting debate. The essential point made by the hon. Member for Regents Park and Kensington, North has been the existence of a poverty trap or benefit trap. That trap exists 11 years after the election of a Labour Government who had argued that welfare reform would be one of their priorities and who have argued that getting people into work is essential in eliminating poverty and encouraging social mobility. What we have heard today demonstrates that, after 11 years, an enormous amount still needs to be done.
The Financial Secretary to the Treasury (Mr. Stephen Timms): I begin by apologising for my lack of punctuality at the start of this debate, Mr. Weir. I am delighted that we are sitting under your chairmanship this afternoon.
As others have done, I congratulate my hon. Friend the Member for Regents Park and Kensington, North (Ms Buck) on securing the debate. I welcome her deep and sustained interest in the topics that she has discussed in this very useful debate, and I certainly welcome her continued interest in policy in this area.
Tax credits today provide support to nearly 20 million people in about 6 million families, including 10 million children. In December 2008, just over 10,000 families, including 19,000 children, were benefiting from tax credits in my hon. Friends constituency, as she knows. I am grateful to her for her very full recognition today of how the system has been valuableindeed centralto reducing the tax burden on low-income and middle-income families. It has helped to ensure that about four in 10 families in Britain now pay no net tax.
I am sure that that success has been one of the considerations behind the conversion of the Conservative party to a degree of support for tax credits, which the hon. Member for South-West Hertfordshire (Mr. Gauke) acknowledged. I am not sure that support is quite the right term; none the less, there has been Conservative acquiescence the system, after a reversal of the partys former opposition to. I welcome that development. I think it is widely acknowledged that the system has done a very valuable job, not least in helping to move people into work and helping them to move up the employment ladder, and in making sure that in the great majority of cases, with some exceptions that we have heard about, work pays more than benefit. The system
has been changed substantially in that direction, which is the right direction, since it was introduced.
The system of tax credits has played a key role in tackling child poverty, as my hon. Friend the Member for Regents Park and Kensington, North also knows very well from her work on that topic; she has taken a particular interest in tackling child poverty in London. As a result of all the changes to the personal tax and benefit system since 1997, families with children in the poorest fifth of the population are now £4,100 a year better off in real terms. That figure will rise to £4,400 a year by 2009-10. Tax credits have achieved a decisive change.
Quite rightly, we have discussed in this debate the take-up of tax credits. As the hon. Member for Caernarfon (Hywel Williams) generously acknowledged, take-up is high, with low-income families the most likely to take up their entitlement. According to the latest figuresnew figures are expected next monthtake-up of the child tax credit was 82 per cent. in 2005-06, with more than 90 per cent. of the money available being claimed. Take-up among those people with incomes of less than £10,000 a year is now 96 per cent., so there is very high take-up, as there should be. As the hon. Gentleman also acknowledged, take-up is higher than for any of the previous systems of income-related in-work financial support for families. The take-up rate was 50 per cent. in the early years of family income supplement, as he recalled; 57 per cent. for family credit; and 65 per cent. for working families tax credit, so take-up now is not only higher, but quite significantly higher than it was in the previous system.
None the less, we need to do more to ensure that as many families as possible take up the help that is available to them. We have therefore convened a taskforce of experts from local authorities and the third sector. It will report in the spring with advice that is particularly addressed to local authorities on how to improve take-up further, while recognising that for many people their interface with the benefit system is initially for housing benefit and council tax benefit. If we can extend support and improve the access to the tax credits system as part of that discussion, we should take that opportunity.
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