HM Revenue and Customs: Improving the Processing and Collection of Tax: Income Tax, Corporation Tax, Stamp Duty Land Tax and Tax Credits - Public Accounts Committee Contents

5  Tax Credits

24. The Department paid £24.1 billion to tax credits claimants in 2008-09.[57] It awards tax credits annually based on the income and family circumstances of claimants. Awards are adjusted where claimants' circumstances change and these are reported to the Department. After the year end, the Department reassesses awards after claimants have confirmed their circumstances and this can give rise to over and underpayments.[58]

25. Since the tax credits scheme was introduced in 2003, the Department has identified overpayments of £8.4 billion. By the end of March 2009 it had collected £2.7 billion of this debt and written off £1.3 billion. £4.4 billion of overpayments remain to be collected. Of this debt, the Department has identified £2.3 billion that it is unlikely to recover.[59]

26. Recoveries of overpayments may be made either by reducing future tax credits awards, or directly from the claimant where the award has ended.[60] At 31 March 2009, the tax credits debt to be recovered from ongoing awards was £1.4 billion. The Department is most successful in recovering tax credits debt where it can offer claimants the opportunity to pay off the debt by deductions from future payments.[61] In 2008-09, £417 million (63%) of debt recoveries were made this way.[62] The Department is less successful where it has to recover tax credits directly from claimants. In 2008-09 it recovered £225 million of debt directly, but by the end of the year debt for direct recovery had increased from £1.8 billion to £2.1 billion with a further £0.9 billion not being actively recovered, for example, where claimants dispute the overpayment.[63] The Department has focused on the recovery of higher value debt, meaning that much of the lower value tax credits debt has received little attention.[64] Some 26% of tax credit debts are less than £1,000 and some 15% are greater than £5,000 (Figure 4). Individual debts of £2,000 and below account for 50% of the total debt balance by value.[65]

27. People who receive tax credits quite often owe money to other agencies as well as the Department. The Department recognises that it needs to work more closely with claimants to help them find different ways to make their payments.[66] For those in employment, the Department is evaluating the effectiveness of adjusting PAYE codes to recover repayments directly from earnings. As part of a pilot exercise, 1,700 households with a debt less than £2,000 are having their tax credits debt recovered through a PAYE adjustment. The Department plans to review the pilot at the end of the year.[67]

Figure 4: Percentage of Total Tax Credit Debt Outstanding at 20 October 2009 by value bands

Source: HM Revenue and Customs

28. For those in the welfare system, the Department is working with the Department for Work and Pensions (DWP) so that people can have their tax credits debts recovered directly from benefits on a voluntary basis.[68] Tax credits debts can be large when compared to many of the other welfare benefit debts. The Department recognises that it needs to work much more closely on tax credits debt with DWP to ensure that their joint resources are coordinated and applied to best effect.[69]

29. The £2.3 billion of tax credits debt unlikely to be recovered suggests that a large proportion of the debt will ultimately have to be written off. In general, the Department will only write off debt when it believes that there is no possibility of recovery.[70] It is reviewing its approach to tax credits debt, so that it can take a view on the cost-effectiveness of collection.[71] It recognises that it has to reach a judgment as to whether the people it is pursuing are simply refusing to pay or genuinely cannot pay. In deciding how it handles these cases, it recognises that it would be unfair on all of those people who have already repaid their debt not to pursue those who have so far failed to do so.[72]


30. Since the tax credits scheme was introduced it has suffered from high levels of error and fraud. The Department estimates that in 2007-08 error and fraud led to incorrect payments of between £1.58 billion and £1.84 billion, higher than in the previous year.[73] The C&AG qualified his opinion on the regularity of tax credits expenditure because of the probable level of overpayments of tax credits attributable to error and fraud.[74]

31. 90% of error and fraud is customer error, the vast majority of which is from people failing to tell the Department when their circumstances change. The Department has introduced a number of initiatives in an effort to improve the level of support to claimants and identify and correct these errors. The Department is improving its forms, notices, guidance and other support it gives to people. It has recently issued a new claims pack containing simpler guidance.[75] It has introduced a 'health check' which involves contacting claimants before they renew their claim to check if anything has changed in their circumstances.[76] It also contacts vulnerable claimants to ensure that they successfully complete the renewal process. The Department considers that the 2009 renewal process was its most successful yet.[77]

32. The Department has joined DWP's Jobcentre Plus 'rapid response' service to employers and employees where there are redundancies of over 20 employees. This is helping to identify those whose eligibility for tax credits will change and helping them get things right at the point where the claim is made.[78]

33. Weaknesses in the tax credits computer system continue to inhibit the Department's ability to improve communications with claimants. Some standard letters to claimants are automatically generated by the computer system which makes it more difficult and much more expensive to tailor communications to address the specific circumstances of individuals.[79] System limitations also prevent it from reassessing claimants' changes of circumstances and telling them what they are entitled to as soon as they report a change. The Department also recognises that errors have occurred because the computer scanning of forms has failed to recognise and take account of manuscript additions. It is now vetting claims forms to identify these instances and making sure that all relevant information is recognised. It is also looking at whether the process can be improved by increasing the scope for more manual intervention at the time the claim form is scanned and input to the computer system.[80]

34. Tax credits are subject to organised criminal attacks. In 2008-09, the Department identified but failed to prevent organised fraud amounting to £31.9 million.[81] It does not have an estimate of the extent of undetected losses due to organised crime. The Department's response to the threat of organised criminal attack against the tax credits system is part of a wider response to combat serious organised crime. In its experience, threats do not generally affect one tax or one aspect of processing. Where its threat assessments have identified threats to tax credits it has been successful in shutting these down. Most of the recent attacks have focused on the self assessment system and on carbon credits fraud.[82]

57   C&AG's Report, Figure 26 Back

58   C&AG's Report, para 5.5 Back

59   C&AG's Report, paras 5.10 and 5.16 Back

60   C&AG's Report, para 5.10 Back

61   Q 27 Back

62   C&AG's Report, Figure 30 Back

63   C&AG's Report, para 5.10 Back

64   Q 27 Back

65   Ev 13 Back

66   Q 34 Back

67   Q 29 Back

68   Q 11 Back

69   Q 35 Back

70   Qq 11 and 14 Back

71   Q 39 Back

72   Q 11 Back

73   C&AG's Report, para 5.20 Back

74   C&AG's Report, para 5.21 Back

75   Q 46 Back

76   Q 21 Back

77   Q 52 Back

78   Q 47 Back

79   Q 51 Back

80   Q 46 Back

81   C&AG's Report, para 5.22 Back

82   Q 24 Back

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