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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. TCC: Many of these families have not exhausted the dispute steps that they are entitled to pursue, but because HMRC do not advise claimants of their rights, claimants do not know how to avoid court action or fight recovery.
Figures uncovered by the Liberal Democrats show that HMRC has already taken 5,697 families to court to recover tax credit overpayments since April, compared to just 1,024 in the previous 12 months. TCC: Is this the start of a worrying trend of a Government short on money pursuing vulnerable citizens to help shore up the country’s finances, forcing children and families into poverty?
The figures show that: 5,697 families taken to court in the six months to October, compared to 1,024 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.
| | Month 2008 | Number | | | | | | | | | April | 450 | | | | | | | | | May | 461 | | Year | Total | % Increase | Av./Month | % Increase | | | June | 922 | | 2006-07 | 41,122 | | 3,427 | | | | July | 943 | | 2007-08 | 1,024 | -98 | 85 | -98 | | | August | 1,417 | | Apr-Oct 2008 | 5,697 | 456 | 950 | 1,013 | | | September | 916 | | | | | | | | | October | 588 | | | | | | | | | Total | 5,697 | | | | | | | | | | | | | | | | | | | Number of court cases pursued by HMRC for repayment of Tax Credits |
Notes - two key points underlined TCC: The current system was introduced to be flexible to changes in claimants’ circumstances, but the system is so slow to respond to changes so that time lags within HMRC, between changes being reported and those changes being auctioned, create overpayments.
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.
TCC: It is highly unlikely that claimants would still have the money. Having received payments which they thought they were entitled to, the money would be spent on paying rent and mortgages, food and essentials for the family.
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.
TCC: The original tax credit system gave set payments for 6 monthly periods, regardless of income changes the payment remained the same for the period of the claim. Whilst this had obvious drawbacks if a claimant’s income decreased, there was no risk of overpayment and claimants were rewarded for hard work and industry if, for example, they chose to work overtime as their tax credit payments were not affected for that period.
TCC: Even if most claimants had the time and sat down with a calculator, the system is so overly complex and convoluted that it would be practically impossible for a claimant to calculate the amount of tax credits they should be receiving.
[Top] Summary of points on overpayments TCC: Whilst this is a vast improvement on the previous 2/3rds of claims incorrectly paid, this is still an unacceptably high level of error and we do not believe that this level of error would be tolerated anywhere but HMRC. One of the reasons why this level of error is not addressed is due to HMRC’s penchant for shifting the blame for errors to claimants; another is hiding the level of error by always putting fraud and error together. The latter has an additional problem of alienating claimants with overpayments.
TCC: This clearly is not working to the Government’s own agenda of reducing poverty, specifically child poverty - the clawback of overpayments hits children hard. The only way tax credits can appear to be working to the anti-poverty agenda is by counting those who initially move out of poverty by claiming tax credits but not putting them back into the poverty equation when aggressive clawback of overpayments pushes those families back into poverty.
TCC: There y'go, everyone's lumping all those figures together! We rest our case ......
TCC: Clearly this a substantial amount of money and it is little wonder that a poverty-stricken government would look to recover this amount. But a recent report by the Joseph Rowntree Foundation on the costs of poverty would demonstrate that this is likely to be a lesser sum than the government would need to spend to address the impact of poverty-struck claimants forced to repay tax credits. In short, it is not in the public purse’s best interest to recover this amount.
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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. [Top]
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. TCC: It is worth noting that the appeal process is mainly conducted by HMRC, so HMRC get to decide who was responsible for the overpayment – it is hardly surprising that they rarely find themselves to be at fault. The only independent view is taken by the Parliamentary Ombudsman, but to get to that stage a claimant must have the support of their MP – particularly challenging for those with Labour MPs! Also, Government continues, repeatedly, to ignore the recommendations of the Parliamentary Ombudsman regarding Tax Credits.
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. TCC: Even if HMRC or the Ombudsman find that the cause of the overpayment was HMRC’s error, they can still enforce recovery of the overpayment - as waiving or writing off overpayments is entirely at HMRC’s discretion, with no clear or transparent system for granting a write-off.
| No. of disputed overpayments | No. of overpayments written off | Value of overpayments written off (£million) | 2005 Total | 351,500 | 162,500 | 6 | 2006 Total | 350,000 | 14,000 | 180 | 2007 Total | 202,000 | 12,350 | 9 |
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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%. TCC: Figures hide the true situation. Take up appears to be more successful than it is, as once a claimant is 'in the system' it is extremely hard to stop claiming tax credits – even when claimants no longer wish to claim!
| 2003-04 | 2004-05 | 2005-06 | Take-up rate (% of entitled receiving) | 13 | 19 | 22 | No. people claiming earning under £10,000 | 14 | 23 | 26 | No. people claiming earning over £10,000 | 11 | 15 | 15 | No. people eligible not claiming | 1,090,000 | 980,000 | 1,010,000 | Amount unclaimed (millions/£) | 1,460 | 1,290 | 1,440 |
[Top] 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. TCC: Would welcome such a move, even given the previously noted inflexibility of the system. In the current financial climate, claimants need to know where they stand and what income they can expect to receive.
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. TCC: We would welcome this. As the only user group solely looking at tax credit overpayments, TCC would welcome involvement in designing communications that claimants can understand.
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. TCC: Would welcome this, but wish to go further and have an immediate write-off of all overpayments prior to the financial year 07/08. The amount of resource – in staff time, administration costs and to claimants – in handling these cases adversely affects the public purse and the time gains could enable HMRC staff to ensure that correct payments are made going forwards. The benefit to claimants would be enormous – not just in terms of finance, but also in terms of reduced stress, depression, ill health and the other unseen costs of a tax credit overpayment. It is fundamentally wrong that HMRC should place this burden of proof with the claimant, but to compound this HMRC hold all the information and evidence that a claimant would need to successfully dispute recovery.
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. TCC: Again, we would welcome this and the opportunity to contribute to such a review.
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