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Brown's Legacy:
The Tax Credit Fiasco
David Laws MP
May 2007
Summary
New Tax Credit figures for 2005/06 due to be released by HMRC on Tuesday 22nd May are expected to show once again that up to �2bn of Tax Credits were incorrectly overpaid, making a total of around �6bn since 2003/04.
Ministerial incompetence and systemic and administrative failures in Tax Credits have created high levels of fraud and error, huge overpayments, and a system ever more draconian in its attempts to recover money it overpaid, often due to official errors.
�4bn in Tax Credits was overpaid between 2003/04 and 2004/05; Tuesday's figures are likely to show that since 2003 this figure will have risen to nearly �6bn.
So far since 2003, �1.9bn has been written off or classed as unlikely to be recovered. Following Tuesday's announcement when the overpayment figures for 2005/06 are finalised, the amount of money which will be unrecoverable will be well over �2bn.
Despite no substantive changes in how Tax Credits have been administered, the number off successful appeals made by claimants from whom HMRC has demanded repayments from has fallen from nearly 1 in 2, to 1 in 25. The number of appeals made against reclaimed overpayments is running at around 350,000 per year.
HMRC pursued legal cases against 38,000 claimants who had been overpaid tax credits in 2006/07 alone.
Fraud and error in Tax Credits in 2004/05 amounted to as much as �1.28bn - over 10% of all Tax Credit payments, making it the benefit with the highest fraud and error rates.
The average cost of administering a Tax Credit claim in 2005/06 was �88 per family, almost �500m in total.
Overpayments
In the first two years since Child and Working Tax Credits were created in 2003, �4bn was overpaid, �2.2bn in 2003/04 and �1.8bn in 2004/05. �1.1bn was underpaid, �0.5bn in 2003/04 and �0.6bn in 2004/05. With 2 million people affected, the average overpayment per person in 2004/05 was �900.
The National Audit Office in its report on HMRC's accounts last year identified that of the �4bn overpaid, �0.4bn had been written off and �2.6bn had yet to be recovered - with �0.9bn of this not likely ever to be recovered. More recently HMRC in its trust statement estimated that out of all tax credits overpaid between 2003 and 2006 �1.9bn was likely to be unrecoverable. When the estimates of overpayments are finalised on Tuesday this figure is likely to rise well about �2bn. The NAO also predicted last year that, with no fundamental changes made to the system, the level of over and underpayments for 2005/06 would be of a similar level to 2004/05.
Recovery of overpayments
In a bid to recover the huge levels of overpayments, HMRC has become progressively more draconian in the way it pursues those who have been overpaid, regardless of whether they can prove that it was the fault of the claimant. This is because 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 give explanation of the overpayment; do not say that they themselves may be to blame for the overpayment or what the circumstances are in which an appeal can be launched or and how to go about appealing - all of which were recommended by the Ombudsman in her report `Tax Credits; Putting things right'.
Even when appeals are launched, HMRC is becoming ever tougher in accepting them, placing more families in severe financial hardship as they are often required to pay thousands of pounds they simply don't have. As the table below shows, the number of successfully disputed overpayments fell from almost 1 in 2 in 2005 to just 1 in 25 in 2006.
� |
No. of disputed overpayments |
No. of overpayments written off |
2005 Total |
351,500 |
162,500 |
2006 Total |
350,000 |
14,000 |
Further to this, HMRC is using it powers to pursue people through the courts for overpayments more and more, again with the assumption that people are guilty until they can prove themselves innocent. Last year alone, 38,000 legal proceedings were commenced aiming to recover an average of �2,260.
Fraud and Error
The NAO in its July report qualified HMRC's accounts, describing the level of fraud and error within the Tax Credit systems as `unacceptably high with no evidence to justify a lower estimate for 2005-06'. HMRC itself estimates that claimant error and fraud has resulted in between �1.06 billion and �1.28 billion (8.8 to 10.6 per cent by value) being paid to claimants to which they were not entitled. This is a higher level of fraud and error than for any other benefit in payment (see table overleaf).
Benefit |
�m |
Percentage |
Tax Credits |
�1280m |
10.60% |
Housing Benefit |
�680m |
5.20% |
Income Support |
�560m |
5.30% |
Disability Living Allowance |
�730m |
9.10% |
Pension Credit |
�280m |
4.60% |
Council Tax Benefit |
�180m |
4.90% |
Jobseekers Allowance |
�180m |
6.00% |
Incapacity Benefit |
�80m |
1.20% |
Carer's Allowance |
�60m |
5.50% |
All other benefits |
�380m |
2.70% |
Costs of administration
In 2005/06 5.3 million people received provisional Tax Credit awards at an administration cost of �467 million, a cost of �88 per family.
Ignoring the Ombudsman
In 2005 the Parliamentary ombudsman, in her report `Tax Credits: Putting things right', put forward 12 recommendations to combat the continuing problems in the tax credit system. Nearly 2 years on, only 4 of her recommendations have been fully or even partly implemented.
Critically, despite the Ombudsman's express concerns and recommendations, the Government still;
fails to explain to claimants why their Tax Credit has been overpaid;
automatically tries to recover overpayments without establishing who is to blame and the financial circumstance of the claimant;
has failed to set up an independent appeals mechanisms against the recovery of overpayments.
Has failed to write off all overpayments due to official error
Despite these failures to implement the Ombudsman's recommendations, in March the Paymaster General said: `I do not have time to read for the record all 12 of the recommendations that the ombudsman made, but the vast majority have been implemented.' Dawn Primarolo, Official Report, 15th March 2007, Col. 181 WH. In fact, following a successful Freedom of information request, it has become evident that just 4 of the 12 recommendations have been fully implemented. Below is a summary of the Ombudsman's recommendations.
Steps should be taken to ensure customer facing TCO staff recognise situations where interim payments are appropriate
Implemented
HMRC should not seek to recover an overpayment until it has come to a decision based on the relevant facts as to whether the excess amount should be repaid
Not implemented, in many cases recovery of excess payment is still automatic �
On the payments page of an award notice customers should be alerted that they can challenge recovery of an overpayment in line with Code of Practice 26 and to do so they need to complete form TC864
Not implemented, although claimants are informed they may appeal, they are not told on what basis, or how to appeal
When it is decided that an in-year excess payment in recoverable it should be done at the same rate for previous years overpayments
Implemented
Steps should be taken to ensure customer facing TCO staff alert to circumstances where Additional Tax Credits (ATC) are appropriate
Implemented
Where an in year recovery of Tax Credits is justified HMRC should take steps to automatically pay ATCs to families in receipt of income support
Implemented
Details of the availability of ATCs should be printed prominently on the payments page of a Tax Credit award notice
Not implemented
Customers who have been overpaid Tax Credits should be sent a letter outlining how much they owe and why and when the overpayment occurred.
Not implemented, although claimants are informed of how much they have been overpaid, they are not told why it occurred
When a customer has been overpaid Tax Credits they should be immediately notified about what has happened and informed of the circumstance in which a recovery can be waived.
Not implemented; by HMRC's own admission they often can not identify where a mistake in a Tax Credit payment has been made
Consideration should be given to writing off all excess overpayments caused by official error between 2003 and 2004
Not implemented
Consideration should be give to the adoption of a statutory test for the recovery of Tax Credits
Not implemented
HMRC should consider the way in which it delivers Tax Credits, appreciating a different model is needed in complex cases where there is more sustained and informed communication with their customers
Not implemented
The earnings disregard
HMRC calculates the cost the cost of the earnings disregard on Tax Credits to be the following:
|
Income disregard of �25,000 (millions) |
2006-07 |
-�50 |
2007-08 |
-�100 |
2008-09 |
-�150 |
2009-10 |
-�250 |
2000-11 |
-�300 |
This cost of the disregard however is not the change in entitlement, but the forgone recovery of overpayments. The basic principle is that when money is paid out to Tax Credit claimants, it scores as a cost to the Exchequer. On the other hand, when any overpaid Tax Credits are recovered, there is a yield. The higher disregard does not necessarily affect the amount of money paid out to claimants in any one year. But by reducing the amount of overpayments, the higher disregard will mean there is less money to be recovered in future years.
For actual costs of the disregard in terms of the increase in the amount of Tax Credits paid, HMRC estimated that there would be an additional cost of �500m, (source: Public Account Committee) by raising the income disregard from �2,500 to �25,000; the NAO have made a separate estimation of between �400m in to �600m. Further to this the NAO in their report last July estimated that the cost in increased Tax Credit payments of the �2,500 income disregard was �800m in 03/04 and �700m in 04/05. This means we can estimate that in 2006/07 the total cost of the �25,000 income disregard as compared to if there was no disregard will be approximately �1.2bn.
The Liberal Democrat 5 Point Plan for Tax Credit Reform
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 create massive instability and a high chance of incorrect payments, no attempt has been made to return to 6 month fixed awards.
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.
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 or even checking if the overpayments are actually recoverable.
Along side this, there should be a statutory right of appeal against overpayments, with a presumption that all overpayments due to official error should be written off. Despite this being one of the Ombudsman's key recommendations, no attempts have been made to implement it
A review of the extent of Tax Credits, to consider if it is sensible or effective to pay complex means tested benefits almost universally.
Figure can be obtained at http://www.hmrc.gov.uk/stats/personal-tax-credits/cwtc-quarterly-stats.htm
http://www.ombudsman.org.uk/improving_services/special_reports/pca/taxcredits05/summary.html
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