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UK Tax Credits

Liberal Democrat Report & 5-Point Plan     17 December 2008

The number of families that have been pursued through the courts for not repaying their tax credit overpayments in the past six months is five times higher than the whole of last year. Figures uncovered by the Liberal Democrats show that HMRC has already taken 5697 families to court to recover tax credit overpayments since April, compared to just 1024 in the previous 12 months.

The figures show that:

• 5697 families taken to court in the six months to October, compared to 1024 in the whole of 2007-08.

• The number of families taken to court between April and October 2008 is 5 times more than the previous 12 months.  

• The average number of court cases each month is ten times higher this tax year to date than the whole of the last tax year.

Notes - two key points underlined

• The instability of the system is to blame. The tax credit system is so unstable and unpredictable that it is almost impossible to know what you should and shouldn’t be getting at the end of each month.

•  It is very worrying that at a time when families are really feeling the squeeze they are facing court action to recover money they may have genuinely thought was rightfully theirs and they probably don’t have.

• The burden of proof is on the family who claim – they have to show that they couldn’t reasonably be expected to have noticed the payment was wrong.  This is clearly unfair – people trust the Government to get things right yet they are being made culpable for the Treasury’s mistake.

•  We need to immediately cut out the instability in the tax credit system by fixing payments for a period of six months – if they don’t change you simply cannot be overpaid. At the moment payments can fluctuate each month if your circumstances change, if you change the amount of child care you get or the hours you work.

• Busy families need predictability – they don’t have to sit down with a calculator at the end of every month and work out what they should get.

• Gordon Brown designed the system and you can tell – it’s complicated and involves a lot of maths. It needs redesigning to suit the families it’s supposed to help who want a simple system they can rely on.

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Summary of points on overpayments

• HMRC overpaid £1.1billion of tax credits to 1.2million families in 2006-07, that’s 1 in 5 families who claimed and that’s an improvement on the previous year!

•  Misery and uncertainty for the 7.03 million families who have received overpayments since 2003, which are then clawed back by the Treasury leaving those on low incomes facing financial hardship.

• Money spent on overpayments, fraud and error in Tax Credits is now over £14billion since April 2003.

• Overpayments amount to over £6.7billion since April 2003.

• Average overpayment last year was £916.

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1. Overpayments 
Tax credits are calculated on person’s income in the previous year then finalised at the end of the year using actual income. This means that even when people keep HMRC updated with all their details they can still be overpaid if their circumstances change and then have to pay it back, irrespective of if the mistake was theirs or HMRC’s – as long as they could have reasonably been expected to notice the error. 

From April 2006 Tax Credit entitlement within a year ignored an increase in income of up to £25,000, a ten fold increase from the original income disregard of £2,500. This was an attempt to reduce overpayments and mask the effect that complexity of the system was having on payments. The treasury predicted this change would cut overpayments by a third, which it did but it doesn’t solve the underlying problem of instability, i.e. massive overpayments still happen. 

Income fluctuations are not the only cause of overpayments, families can be overpaid Tax Credits when another of their circumstances change, even if they keep HMRC fully informed. For example, changes in the cost of childcare, hours worked, number and age of children or the end of a relationship can change an entitlement and mean that families are overpaid when their award is finalised at the end of the tax year. People find it difficult to understand why a positive change in their lives, such as returning to work, can leave them struggling to repay an overpayment at the end of the year. 

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2. Recovery of Overpayments
In a bid to recover the huge levels of overpayments, HMRC has become progressively more draconian regardless of whether they can prove that it was the fault of the claimant. 

HMRC will assume that the claimant is responsible for the cause of the overpayment unless the claimant can prove otherwise. 

Although claimants are told they can appeal the  recovery of an overpayment on their Tax Credit Award, HMRC do not say that they themselves may be to blame for the overpayment. 

What is most concerning is the reclaiming of overpayments from very low income families; in 2006-07 486,000 families on less than £15,000 annual income were overpaid an average of £535 which has to be paid back. 

Even when appeals are launched HMRC is becoming ever tougher in accepting them. The number of successfully disputed overpayments fell from almost 1 in 2 in 2005, to just 1 in 25 in 2006, and has only marginally improved to 1 in 16 in 2007. 

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3. Low ‘take up’ rates and underpayments
Since 2003 3.3million people have been underpaid Tax Credits. In 2006-07 135,000 families were underpaid over £1000. Most worryingly, 326,000 families on less than £15,000 income were underpaid in the same year, families that desperately need Tax Credits. 

The system is failing to effectively target resources at low income families without children. Since the Working Tax Credit was introduced for childless people on low incomes, the take-up rate has never exceeded 22 %. 

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The Liberal Democrat 5 Point Plan for stabilising the Tax Credit system 

1.    A return to stable, 6 month fixed, awards – ending the chaos and instability of the existing system, which is particularly damaging for families on low incomes. Despite all the evidence that variable awards creates massive instability and a high chance of incorrect payments, no attempt has been made to return to 6 month fixed awards.  

2.    Much simpler, clearer award notices. Although there have been some improvements made to the award notices, there is still widespread criticism of the number of and the clarity of the awards notices. 

3.    An immediate end to what the Ombudsman has called “systemic maladministration” – automatic recovery of Tax Credits by the Revenue, together with a reversal of the burden of proof. Despite the hardship it causes, HMRC tries to recover Tax Credits without proving that the claimant was responsible for the overpayment. It is the responsibility of the claimant to prove their innocence. 

4.    Alongside this there should be a statutory right of appeal against overpayments, with all overpayments due to official error being written off.  Despite this being one of the Ombudsman’s key recommendations, no attempts have been made to implement it. 

5.    A review of the extent of Tax Credits, to consider if it is sensible or effective to pay complex means tested benefits almost universally.

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Tax Credit Casualties (TCC) is a voluntary, unfunded, not for profit organisation run by members for members. We cannot take any responsibility for decisions made by HMRC, The Parliamentary Ombudsman, The Adjudicator, or any other organisation, regarding claimants cases. We offer free advice on how to dispute unfair overpayments based on our own experiences, the experiences of other claimants and HMRC guidelines.
Please note that we are not tax professionals and are working on a voluntary basis, unpaid, in our ‘free time’. Between us, we have a lot of experience and knowledge in this area, gained over the last few years of supporting victims and helping them fight for justice and their rights. Legislation, operating practices and individual cases change all the time, and while we aim to be professional and accurate at all times, please understand the circumstances we are working under and accept our support, guidance and information in the sprit it is offered; goodwill and camaraderie.

Our Standards
TCC was established to provide advice and guidance on disputing recovery of non-fraud tax credit overpayments and to lobby for fundamental change on the inbuilt flaws and inequalities of the tax credit system. Whilst TCC provide guidance and information on how to handle disputes and even provide an advocacy service in some instances, neither TCC as an organisation not any participating members are responsible or liable for outcomes of disputes which remain wholly the remit of HMRC, the Adjudicator and/or the Parliamentary Ombudsman, as appropriate and dependent on the stage of dispute. TCC operate in a professional manner and endeavour to give accurate and appropriate advice based on information provided by members. TCC endeavour to respond to members as quickly and efficiently as possible, given the voluntary nature of the organisation and limited resources available. TCC is an inclusive organisation and will treat all members in a fair and equitable manner.

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