Tax credits

The nightmare continues

Siobhán Harding (Citizens Advice) and Kevin Higgins (Advice NI) detail worrying reports by advisers and the House of Commons alike on HMRC’s handling of tax credits overpayments and explain the key role played by the advice sector in Northern Ireland in highlighting the hardship caused by this issue.

Representatives from Advice NI and Citizens Advice were called as witnesses to give evidence before the House of Commons Treasury Sub-Committee on Wednesday 18 January 2006. The Sub-Committee in particular wanted to:

	examine HMRC's implementation of the six measures for improving the tax credits systems which the Paymaster-General identified in her written statement to the House of Commons on 26 May 2005;
	examine HMRC's recovery of overpayments of tax credits; and
	seek to identify future solutions to the difficulties encountered in administering the payments system. Impact on vulnerable people

Advice NI was able to draw upon the work of member organisations in dealing with tax credit overpayments cases and on an eConsultation exercise it had conducted specifically on the overpayments issue. Its statements to the Committee included:
‘there is no doubt that it has delivered en masse £16 billion worth of benefits to approximately six million households, but I have to question is it an understandable and comprehensible system for the people that it is mostly aimed at supporting. Certainly we would question the impact of overpayments on vulnerable and low income households. Finally, we would have to question the opportunity lost in government going down the road of this current system and what difficulties could have been alleviated by taking some other option towards this sort of support.’

The Committee was particularly interested in statements stemming from the eConsultation. These included:

‘We ran the eConsultation for the month of February to March 2005. Basically we were more or less overwhelmed with the number of messages that were posted on to the forum. When we finished the eConsultation at the start of March we tried to sift that and turn them into a manageable report. What came out of that was very clearly, first of all, the emotional impact that the overpayments issue is having on people. To quote one posting: ‘Please, please, please, someone help me. I cannot sleep at night worrying about this’. (…) As to definitive issues, there were communication issues between HMRC and claimants, operational issues, the likes of technical problems and IT problems, and the strategic issues to do with overpayments being inherent in the system and problems with recovery and people not feeling empowered enough to dispute the recovery process.’
In relation to clients being enabled to dispute tax credit overpayments, statements to the Committee included:

‘I think in the past the Revenue said they were trying to get a balance between compassion and compliance but I think that the evidence demonstrates that vulnerable people should not be relying on the compassion of Revenue staff. Clients need to be relying on a rights-based legislative format for disputing recovery of payments.’

No key contacts for advisers

Citizens Advice was similarly able to draw upon the experiences of advisers dealing with the tax credit overpayment issue on a daily basis. Some evidence to the Committee included:

‘From April 2005, the customer services facility that used to exist in Belfast was transferred to Preston and integrated with the services for intermediaries in Great Britain. That has removed a lot of key local contacts that we were able to build up in Northern Ireland to answer the complex or more involved cases. In addition to this, we no longer have the facility to meet with HMRC representatives in Northern Ireland to talk about issues face to face. That whole area of local communication has been removed from Northern Ireland.’

HMRC errors

‘The increase in the annual income disregard to £25,000 will obviously cut down on the number of overpayments there are but that does not take away from the fact that there are a lot of overpayments out there which are as a result of HMRC error or where changes in circumstances have been reported and those have not been actioned leading to an overpayment.’
‘There was a particular computer error known as the Red A computer error. It was known as that because it affected hundreds of thousands of payments, there was a bug in the system in June 2004 which caused the miscalculation of thousands of award notices.’

Latest developments

In April 2006, the Commons Public Accounts Committee published a report highlighting that ‘gigantic’ overpayments of tax credits have been repeated for the second year in a row. In the first year of the tax credits scheme, HMRC overpaid £2.2 billion to 1.9 million families (representing a third of those claiming tax credits). HMRC has announced a similar level of overpayments for 2004-2005 awards. The Committee’s Chairman, Edward Leigh, said ‘an element of overpayment to claimants was an inherent part of the design of the tax credits system. What came out of the blue for the government was that overpayment would routinely occur on such a gigantic scale.’

Evidence from advice agencies in Northern Ireland clearly shows that one of the biggest issues with the administration of the tax credits system is overpayments leaving many claimants in severe financial hardship. Since the introduction of the tax credits system, advice agencies have been inundated with cases where HMRC is seeking to recover money from families. Claimants report problems with tax credit award notices giving insufficient information regarding overpayments and the reasons for them, conflicting award notices stating different levels of overpayment, the lack of appeal rights on overpayment decisions, inconsistencies in decision-making regarding disputed overpayments and the length of time taken to resolve overpayment disputes.

In the last pre-Budget report, the Chancellor announced plans to simplify the system to alleviate some of the problems identified with tax credit overpayments. From April 2006, the amount by which income can increase before affecting entitlement to tax credits has increased from £2,500 to £25,000. While this should significantly reduce the problem of overpayments, the change may give rise to other important consequences for claimants and will not impact on awards until April 2007.

Tax credit claimants whose circumstances change, for example, by getting a new job or a pay rise, will not notice any change in their current tax credit award unless their income increases by over £25,000. However, in the next year the claimant may receive very little or no tax credit award and it is this change in financial circumstances which gives rise to concern as it is natural for people to make financial commitments on the basis of their current financial situation with the assumption that this situation will remain the same over time. So, while a generous bonus exists in the first year and the number of overpayments may reduce, many people will not be aware of the implications of this change on their future financial planning and it may once again mean that the tax credits system creates financial hardship for claimants.

From an advice point of view, advising claimants on tax credits is not getting any easier and this has been further complicated by the removal of local Northern Ireland Customer Service contacts within HMRC. So when an adviser is unable to resolve an issue through the Tax Credits Helpline or the Welfare Rights Priority Helpline (now based in England) it is virtually impossible to do anything to help the claimant except by writing to their local MP or passing the details to the Parliamentary Ombudsman. What is frustrating for advisers and claimants is the length of time taken to resolve tax credit cases particularly those which are more complex and the lack of clarity from some HMRC staff and indeed from tax credits documentation in response to queries.

On a positive note, HMRC is looking at a number of initiatives with other agencies including advice agencies. These include HMRC staff providing tax credit surgeries in other organisations, and direct access to the complex cases team in HMRC. It is likely that these pilot initiatives will run over the course of a year and provide HMRC with a valuable insight into the problem areas in advising claimants on tax credits. Citizens Advice hopes that this understanding of the practical problems within the administration of the system will enable HMRC to make the necessary changes in order that the system may work more efficiently.

It remains to be seen whether or not the proposed changes announced in the pre-Budget report will help the purported ‘flexible and responsive’ tax credits system to deliver greater certainty for those families who experience changes in their income.

© Law Centre (NI) July 2006