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]
ERROR AND FRAUD
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
| 
