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Westminster Hall

Volume 458: debated on Thursday 15 March 2007

Westminster Hall

Thursday 15 March 2007

[Mr. David Marshall in the Chair]

Tax Credits

[Relevant documents: Sixth Report from the Treasury Committee, Session 2005-06, HC 811, and the Government’s response thereto, HC 49.]

Motion made, and Question proposed, That the sitting be now adjourned.—[Steve McCabe.]

On behalf of us all, I welcome you to the Chair, Mr. Marshall. I am grateful for the opportunity to debate the Treasury Committee’s sixth report, which was published last June, and which the Sub-Committee followed up by taking oral evidence from the Paymaster General yesterday afternoon. I understand that the transcript of those proceedings is available to hon. Members.

The Committee has not been alone in inquiring into the matter. Ours is one of a series of reports on tax credits. The Parliamentary Commissioner for Administration reported on the subject in June 2005, and the Select Committee on Public Administration reported on her report in January 2006. Also in 2006, the Select Committee on Public Accounts reported on the Inland Revenue standard report 2004-05 of the Comptroller and Auditor General.

It is important to state at the outset that neither those reports nor the Treasury Committee’s questioned the principle of tax credits. Our inquiry focused solely on their administration. I hope that it is understood across the Chamber that no one is opposing tax credits in principle. Indeed—I hope that I will be forgiven this personal reminiscence—the Paymaster General will recall dealing with the paving legislation, the Tax Credits (Initial Expenditure) Act 1998, nine years ago, when I was her shadow. At that time, I said,

“we are not opposed in principle to the translation of benefits into tax credits provided that the system is transparent, easy to operate, does not impose a significant additional burden on employers”—

we were then discussing the working families tax credit—

“and is fully compatible with the principles of independent taxation that we introduced.”—[Official Report, 14 May 1998; Vol. 312, c. 566.]

I hope, therefore, that there is a general acceptance that the principle is not at issue. Indeed, I shall go further than that, given that the Paymaster General is here, and say that it is clear to the Treasury Committee and to me that tax credits have been successful in improving benefit take-up. It is also pretty clear, four years after their introduction, that they have improved the incentive for people to return to work.

The Committee took evidence from all the key parties involved, especially those who work directly with claimants—I am grateful for their evidence—and found that where the system has been less successful is in its implementation and administration. It is clear that there were serious faults from the outset in the design and implementation of the system’s administration. The Government recognised those problems in the 2005 pre-Budget report when they introduced structural reforms to tax credits. The Committee noted that the Chancellor of the Exchequer did not rule out, should problems with the structure of the system persist, a return to the original fixed awards system.

What are the fundamental flaws of the present system? First, it was clear to the Committee from our evidence taking—not only did we take evidence from those who handle claims, but we visited the tax credits office in Preston—that the administration of tax credits was and is insufficiently claimant-centred. It is the circumstances of the poorest people and those who are most in need that fluctuate the most often, and not simply from year to year. The system that deals with their needs should be the most flexible, but it is not. Many of the people whom we as constituency MPs have had to help budget not for a year, but for a month or less. The income of many such people becomes more variable after they begin to receive tax credits.

Secondly, Revenue and Customs still does not fully assess, as other Departments that administer benefits do, the scale of official and IT error. We now have a pilot programme, the results of which suggest an official error rate of about 5 per cent. As the hon. Member for Leeds, East (Mr. Mudie) brought out very well yesterday, the Department for Work and Pensions publishes regular error statistics, but the best that we are told about the IT system is that it is now only stable.

Does the hon. Gentleman agree that when the Committee visited Preston, we gained the strong impression that there is an astounding lack of the quality management information that is needed to enable the operation of the system, targeting of resources and coherent understanding of what is going wrong?

Yes, I agree. The hon. Gentleman brings his IT experience to bear. I shall come back to the lack of a joined-up approach with technology, particularly the lack of access to the whole picture that people have when dealing with claimants, including the most complex cases.

The third flaw is the most notorious: the extent of wrong payments—both overpayments and underpayments. We have the figures for the second year of operation, 2004-05, in which about 5 million people received tax credits. Of those 5 million, 2 million were overpaid and 900,000—very nearly 1 million—were underpaid. That amounts to a total of nearly 60 per cent. wrongly paid. I fully understand that the Paymaster General might contest those figures and might wish to explain a little more than she was able to yesterday how they are compiled. However, let us be clear that the scale of overpayment and underpayment is still far in excess of what might have been anticipated. The total amount of money that was overpaid might have decreased, but the total amount that was underpaid, which is much more serious in a way, has increased. The overall scale of erroneous payment is still worryingly high.

The fourth problem is in the recovery system. Given the scale of overpayments, how are they to be reasonably recovered? The Committee urged several solutions on the Government. First, we recommended that in each case there should be a pause before recovery, but that has not yet been implemented. Secondly, we asked for the publication of written guidelines for the streamlined procedures. It looks as though those procedures operated in the period before the disregard was increased, but in a particularly arbitrary way. Thirdly, we asked about the whole rationale for writing-off. It became clear that the new streamlined procedure did not apply to those whose disputed overpayments were not written off before its introduction. That is shown by the substantial drop in the number of payments now being written off—the relevant figure of about 44 to 45 per cent. in 2005-06 appears to have fallen dramatically to just 3 per cent. in the opening nine or 10 months of the current financial year. HMRC is clearly taking a much harder line. A number of colleagues will be aware of that through their constituency casework.

We should also consider the test of reasonableness. Yesterday, the Paymaster General’s evidence to the Treasury Committee fell back on the defence that HMRC was using the same sort of test as the Department for Work and Pensions. The situation might be better described as being the other way round: the DWP might well be employing the test of reasonableness used by HMRC.

We should also consider the question of appeals. I am not talking about the appeal against the decision on whether or not someone is entitled to a tax credit, but the appeal in relation to the decision on disputed overpayments. We have recommended an appeal mechanism. The Paymaster General has refused to concede one, but, significantly, she has at least given an undertaking. Yesterday, in answer to the hon. Member for Leeds, East, I believe that she undertook to refer this important issue of comparability between the appeals system operated by the DWP and the appeals system that she is refusing for the HMRC to the Treasury solicitor to see what type of comparability can be properly established.

The fifth issue that the Committee focused on was the extent of fraud and losses. Our concern was that the data from each year are not published for a long time. That may be the result of something inherent in the tax credits system, but we did not see the full extent of the fraud and losses for the first year of operation, 2003-04, until July 2006. The data for 2005-06—the 12 months up to last March—will not be published until this summer. It is difficult for those outside the Department and those in this House who wish to scrutinise these matters to get a clear handle on whether fraud is increasing and on whether the losses to the Exchequer are mounting.

One crucial test is the extent to which HMRC is able to check properly whether the right people are being paid the right amount of money. As I said, 5 million families received tax credits in 2004-05—the second year of their operation—but only 2 per cent. of the claims were fully checked for compliance. I appreciate that other basic checks are carried out, but that is an extraordinarily small percentage; only 100,000 or so claims out of 5 million are checked for full compliance before they are paid out. The Paymaster General might wish to add to the answers and reassurance that she attempted to give the Committee yesterday afternoon.

I would also like to press the Paymaster General for a little more detail on the extent of losses. It has been put to us that they could amount to as much as £1 in every £3 that has been overpaid. This is the other side of the overpayment coin. On the one hand, HMRC is now making a strenuous effort, applying its tests more harshly, refusing to write off overpayments and attempting to recover them, but on the other hand, it appears that a formidable sum was written off in the first two or three years of operation and will not be recovered to the Exchequer.

The next area of concern for the Committee was the culture of HMRC. That is not necessarily a reflection on the staff whom we met or the staff who are operating in HMRC, who were confronted for the first time with being part of the benefits system. Those who worked in the Revenue and in Customs had no previous experience of that system and a cultural shift in the way that civil servants and officials discharge their duty was necessary. The overwhelming impression that the Committee was left with, as we mentioned in our report, was that the administration of the system was based around functions and tasks rather than around the needs of claimants. Claimants with the most complex cases did not have one person in charge of their case to whom they could turn. The operators on the other end of the telephone could not see all aspects of a case on their screens, simply because of how the administration was set up. We noted that concern.

It is worth putting on record the fact that the Government’s response to our report was three months overdue. It was published after the deadline of two months for responding to a Select Committee report. I should say, however, that the Paymaster General has apologised for the delay. She has examined our proposed reforms and made some progress in improving some of the processes. We now have the clearer award notices and the playback statements, there has been an improvement in the helpline, and it appears that there has been an improvement in the accuracy of awards. All of that is extremely welcome, if not somewhat overdue.

The tax credits system is now ending its fourth year of operation after almost five years of preparation. It is an enormous system, paying out £16 billion in tax credits in 2004-05. It is essential for our constituents and taxpayers that it makes the payments as efficiently as possible, without fraud or losses, and that it does so as effectively as possible. It is particularly important that it helps those in greatest need. It is the claimants of tax credits, not hon. Members attending this debate or the Treasury Committee, who will be the real and best judges of whether the system is working successfully. The evidence that the Committee took, the recommendations that we make and the contents of the postbags, e-mails and phone calls that our offices receive all combine to give us the strong impression that there is still a long way to go to improve the administration of the tax credits system to the point where it is properly efficient and effective.

It is a pleasure to follow the hon. Member for Sevenoaks (Mr. Fallon) and to be under your chairmanship once again, Mr. Marshall. This makes it twice in three weeks—some people might think that we had better stop meeting in this fashion.

I want to touch on two or three matters that we raised in the Sub-Committee yesterday. The hon. Gentleman’s opening remarks set the tone, because this is not a debate about the principle or the policy of tax credits; it is about their administration. If we had had this debate nine months ago, there might have been more people in the Chamber and the words being exchanged might have been warmer, but not in terms of being friendlier. I am never much in love with Treasury Ministers, and we usually give them a hard time, but I pay tribute to the Paymaster General. We all recall the ombudsman’s special report that was brought about because of the number of complaints that the ombudsman had received about tax credits. We also remember the special statements and many questions in the House, and the responses from hon. Members on both sides of the House.

It was interesting that proceedings in yesterday’s Sub-Committee were much calmer. There were differences, but they related to just a small proportion of the complaints that arose from the ombudsman’s report. It is a tribute to the Paymaster General that she pushed that massive department into acting. Members of the Treasury Committee know that Her Majesty’s Customs and Excise is not easily pushed, because it is like steering an ocean liner, and we all know the time lag when it changes direction. It is a tribute to her that in nine months she has managed to clear so many issues from the decks. Our debate might be seen as something of an anticlimax, but it is a good opportunity to put on the record some of the matters that remain outstanding and some of those that we spoke about yesterday.

It would be remiss of me not to thank the people and organisations that gave evidence, including Citizens Advice and the Child Poverty Action Group—that reveals what evidence I have read. There was a fair bit of evidence from them, and they worked closely with the Sub-Committee, which has always been impressed by their earnestness, endeavour and compassion for their customers. As the hon. Gentleman said, that seemed to be lacking in the department.

A tax department is not used to negotiating or being compassionate. It collects money and has all the power. When a department has all the power, it tends to use it brutally with little time for people’s sensitivities. It was a new endeavour to ask HMRC to relate to the poorest people in the country, their benefits and other issues affecting their standard of living. It has taken some time to shift the culture and ethos of the department, but it is clear that, with helplines and so on, the ground is moving.

We must consider having a physical presence in the regions so that people can speak to another human being other than on the telephone. The Inland Revenue does that with tax problems. The last thing that people who are not used to computers or writing letters, and who are struggling to keep families afloat, want is to have a long, protracted correspondence about entitlements or payments, particularly overpayments. To be able to speak face to face to someone with access to a linked computer with the customer’s details would be invaluable, and if claimants were treated as customers rather than clients that would be an enormous step forward.

I want to touch on two major matters that I raised in the Sub-Committee and to which the hon. Gentleman referred. The first is entitlements. We welcome the appeals procedure for entitlements. If the tax credit people make an award and the recipient is unhappy about it, there is an independent appeal process. People can appeal, but CPAG said in the Sub-Committee that it had experienced some difficulties. To describe it in immigration terms, if someone receives a bad decision from the Home Office through an entry clearance officer and appeals, the matter is taken from the Home Office and administered by the Asylum and Immigration Tribunal. CPAG indicated that HMRC acted as the gate-keeper and decided whether an appeal was valid.

That is not acceptable. We were assured yesterday that that did not happen but, in the best civil service fashion, the assurance was somewhat vague inasmuch as we were told that differences had arisen and that there had been discussions with CPAG, but that they had been resolved and that HMRC was not acting as gate-keeper. It would be good if that were so, but were the difficulties that were mentioned euphemistically in fact HMRC acting as the gate-keeper and deciding which claims went to appeal? Does the phrase, “We have now settled our difficulties,” mean that a proper system is now in operation?

I think CPAG takes offence—perhaps I am wrong—when the Revenue receives a complaint and a request for appeal, and takes the opportunity to try to negotiate. That could be seen as interference, but I am not sure that it is. To return to my comparison with immigration, I welcome it when a constituent wants to appeal and brings the matter to me first, because I can ask for a review. It can save the country, the constituent and the Home Office a lot of money if the entry clearance officer takes another look at the case and considers whether they really want it to go to appeal. Too often they say yes, but that is what happens with entry clearance officers, and I am sure that that does not happen with the Revenue. I welcome the opportunity of a review procedure and do not see it as interference, as long as it is made absolutely clear in every piece of literature that is sent to the customer that the decision is not final and that they have a right of appeal to an independent body.

As the hon. Gentleman said, this debate is not about the principle of the tax credit system. The hon. Member for Inverness, Nairn, Badenoch and Strathspey (Danny Alexander) wants to change the system, which causes some difficulty, but a good part of the system is its flexibility and not using fixed figures. As the Paymaster General said yesterday, 700,000 people benefit from the in-year changes, so I do not want them to go easily. However, because the system is flexible and retrospective, there is a period before the income that people said they would receive and that which they actually receive is examined, and if there is a difference HMRC seeks to claw it back. That is bad, and it almost encourages disputes, arguments and unhappiness if claimants are told to repay money that has probably been spent, especially if someone is low paid, because the claimant thought it was an entitlement. When that happens, they must think, “This system was designed to take me out of poverty, but it is pushing me further into it.” My plea to the Paymaster General is that if we want to have flexibility, we must deal with the way in which overpayments are handled.

The system has benefited thousands of my constituents, and I pay tribute to my right hon. Friend the Paymaster General for all her hard work in refining the system so that it works better. However, most of the problems that come through my office are to do with repayments, to which my hon. Friend just referred. The origin of most of them is a dispute over whether the tax credit office was informed about changes in the claimant’s circumstances. Generally, my constituents say that they have informed the tax credit office on the telephone, as the office informed them that they should, but that there is no record of the telephone conversation.

Does my hon. Friend agree that one way of dealing with those disputes, which are terribly depressing for everybody involved, debilitating and wasteful of public money, would simply be for the tax credit office staff who take those phone calls to supply a reference number?

Perhaps you should remind me that main speeches should be brief as well, Mr. Marshall. You have been very gentle with me.

I was going to mention telephone calls, but it is clear from the evidence that calls are recorded and kept. At a seminar that took place in the past couple of weeks, the HMRC officer present was pressed on the issue. She said that she would not be happy if requests for recordings were widespread, because it takes a long time to find and prepare them. However, I put on the record for the public that they can ask for a CD of their conversations. They are useful and allow people to cut out a great deal of argument.

We must first consider the system, because when overpayments are drawn to the customer’s attention, recovery begins immediately, and the Treasury Committee unanimously believes that that is wrong. Money is taken from the person’s award straight away, and if they complain, recovery is put on hold until HMRC decides that it is right, at which point recovery restarts. We have asked that the pause—the famous pause—provides the customer with sufficient time to think about the information that HMRC has passed to them, seek advice and help and enter into dialogue with the department before recovery starts.

The Paymaster General is a very nice Minister, and she is on record as saying that the Government will “try.” I had some fun with her about that yesterday, because there is no such word in political life as “try.” It is like a football match: the players either do or do not, but do not tell me that they “try.” Anyway, she is trying, and she thinks that our request is desirable, and that in principle, a pause is okay. We all hate verbatim reports, and Members can understand why I do, but in yesterday’s verbatim report, the Paymaster General said that she did not have a specific IT release—I do not know what that means—in which she would be able to say that she wanted the pause to go in. She also said that she was still asking her Department to consider the idea and its consequences.

The Paymaster General should get Gerald Kaufman’s book. I am sure that she has read it. I am not sure about using his first name—

I shall refer to him as my right hon. Friend the Member for Manchester, Gorton (Sir Gerald Kaufman). I am sure that he is learned and everything else, but he certainly wrote a good book. He would not ask a department to consider the problem; he would tell the department, “I’m under great pressure from my party, my colleagues and Opposition Members, because everybody wants a pause, so do not consider it, do it. If there are consequences, tell me, but those consequences must be grave, otherwise you should just go ahead and do it.” That is what I want the Paymaster General to do.

I apologise for interrupting the hon. Gentleman’s flow, because I am listening carefully to what he says, and he has made a good point about overpayments. When HMRC decides that somebody has been overpaid and recovery begins, people are often not notified straight away, and they often eventually receive a notice, saying that they have been overpaid x thousand pounds and must repay it, without receiving any breakdown of the way in which the overpayment was calculated. They find that process very distressing. Does he agree that when HMRC writes to people to allege an overpayment, it would be helpful if it provided a simple breakdown of the way in which the overpayment was alleged to have occurred?

I am sure that the Paymaster General would say that HMRC already does so, but the hon. Gentleman makes an important point, and one that the action groups have made, too. I support—we all support—the recommendation of the hon. Member for Sevenoaks, whereby individuals should have recourse to appeal to an independent tribunal, but although they do not have such a recourse, they can still go to the adjudicator. The Paymaster General’s industrial relations background should come in handy, because when we were involved in trade union matters, and a dispute with management went through a set procedure, we always insisted on the status quo and that, until a final decision was taken on the matter, management should not act arbitrarily or unilaterally.

When an individual’s first indication of unhappiness is noted, recovery stops, and then HMRC says, “We are right,” and it restarts. The customer can take their appeal to the adjudicator, then to the ombudsman, and even—it is suggested—to judicial review. Although I do not know how many of my low-paid constituents would take the latter path, the pause should not end until the entire process has been exhausted, because the matter is still in dispute.

The hon. Gentleman said something in good faith, but I am not sure about it, because we get terribly mixed up with the appeal system. Yesterday, the Sub-Committee discussed whether the Department for Work and Pensions has an appeals system for overpayments. DWP overpayments are not recovered unless fraud has occurred, and the Library’s notes for the debate back me up. We have two different situations and two different legal positions, and although the latter might be the cause of the difference, there is a question mark over the interpretation of departmental policy.

According to the Library, and according to other information supplied yesterday, which we have agreed to send to the Treasury’s solicitor, the DWP has not sought to recover official error overpayments—unless the hon. Gentleman was right and it is being pushed into replicating HMRC’s bad system. HMRC does not have the rider—this is its policy—that it will not recover an overpayment if it is a result of an official error and if the customer could know that the payment was made in error. The DWP does not have that rider. It will recover overpayments if there is any question of fraud, misrepresentation or missing information, but it does not seek to recover an official error, which is the policy that we are after.

Yesterday, we pressed the Paymaster General to consider bringing the right of appeal against tax credit overpayments and recovery into line with that at the DWP and operating it under social security legislation, rather than tax credit and tax law. We would like that to happen, because the question is not whether overpayments are made, but whether people have a right of appeal in principle.

Therefore, HMRC could decide tomorrow to follow the DWP in having a single basis for not recovering overpayments that result from official errors. The DWP has done that for years, and the auditor is happy with that. We are arguing, first, that that should happen and, secondly, that the tax credit law should be changed, because there is no right of appeal on overpayments—those are two subtly different points. There is a strong argument for changing overpayment law.

I am sorry about the time that I have taken, but let me just say that tax credits have worked. We can see the evidence in our constituencies, where families have got back to work and people have benefited. However, we can also see the trauma caused by overpayments in particular. It is as if we had built a great ship, but there was a tiny hole in the bottom that had sunk it.

I am sorry to interrupt my hon. Friend’s peroration, but is there not one very simple way to plug that hole—a telephone system that responded efficiently to claimants? All too often, my constituents are desperate because they have just received a court summons, but they cannot get through on the telephone. Would not an efficient telephone system be one way of plugging the hole to which he referred?

I sympathise with my hon. Friend and I am all in favour of regional representation, better helplines, better telephone lines and all that. At the end of the day, however, there is the question of the public money that is paid over, the entitlement that people have and the effect of all this on families. If we are going to claw back tremendous amounts of money and push families deeper into poverty, the very least we should do is give them the opportunity to have an independent person decide whether the department is right or wrong, rather than letting the department take the decision.

The adjudicator was represented at the seminar that took place two weeks ago for Members’ staff. She said that it did not matter whether people came through the fast track that the department is pushing. She said that, as an adjudicator, she could not set the law or precedents, and that even if complaints flooded in to her in greater numbers and she took faster decisions, she would still have to balance them against code of practice 26 and the reasonability test, so that would not help things. What we really need is to change the law and the policy in a minor way, so that people are given the opportunity to have their case heard before an independent tribunal.

Having said all that, let me add that although I have raised two important points, they are dwarfed by the number of major points that could have been raised nine months ago. Again, I pay genuine tribute to the Paymaster General on the work that she has done in clearing the decks of so many difficult problems.

I am grateful to the Select Committee for having done a difficult job very well. I am delighted to see the Paymaster General in her seat—the correct seat—this afternoon. This time, she certainly does have responsibility for the matters before us, although by the time I have finished, she may wish that she did not. Much of the Treasury Committee report deals with the recovery of overpaid tax credits and what is risibly entitled “Improving HMRC’s service to claimants”, and I should like to concentrate on those two issues.

I am currently dealing with 28 cases involving claims for the repayment of tax credits. Although that is an improvement on the 46 cases with which I was dealing, there is still a long way to go. Of those 28 cases, seven are with the adjudicator and six, which have been rejected by the adjudicator—I shall return to that later—are with the ombudsman. Every one of those cases represents a demand for money from a family with children that is, by implication, on a low domestic income. In every case, that demand is for money that the family has spent and does not have, and it is causing misery. The hon. Member for Leeds, East (Mr. Mudie) referred to families struggling to keep themselves afloat, and that is exactly what these people are doing.

In almost all those cases—HMRC acknowledges this—my constituents have provided correct income details in a timely fashion. They therefore have a right to expect that HMRC has done its job properly and that the money that they received is theirs by right to dispose of as they see fit in the interests of their families. Instead, they are being penalised for the incompetence of a failing management and a failing system.

I do not want to hear any more tales from the Paymaster General or any other Treasury Minister about the enormous success of the tax credit system or the millions who are receiving help. The 28 cases that I mentioned, and more than 300,000 others like them, involve real people suffering real distress as a result of the failure of the chairman of the Revenue and Customs and the civil servants working under him to manage the system properly and deliver an efficient service.

Following a scathing report from the adjudicator, Dame Barbara Mills, the Prime Minister told me on the Floor of the House on 22 June 2005:

“we will not seek to get the money back if the error is on the part of the Inland Revenue.”—[Official Report, 22 June 2005; Vol. 435, c. 798.]

A week later, on 29 June, the hon. Member for Yeovil (Mr. Laws), referring back to my question, pressed the case again. The Prime Minister told him:

“my understanding is that the code of practice makes it clear that if the error is on the part of the Government rather than the recipient, there is not a recovery.”—[Official Report, 29 June 2005; Vol. 435, c. 1292.]

Would that it were so.

The weasel words that HMRC now uses as a shield lie in the second half of the Prime Minister’s answer to me. He said:

“In the interests of the general taxpayer…we obviously cannot say that overpayments resulting from a claimant’s change of circumstances should stand.”—[Official Report, 22 June 2005; Vol. 435, c. 798-9.]

Those words have been interpreted to mean that even where a claimant has provided full and correct information in a timely fashion, as most have, but HMRC fails properly to process and take account of that information and to make the necessary adjustments, the overpaid money resulting from that failure will be recovered, notwithstanding the Prime Minister’s very clear undertakings, which he gave on not one, but two occasions.

The device—that is precisely what it is—that is used to justify the unjustifiable is HMRC code of practice 26. COP 26 is not a law, but a code of practice, which was introduced without parliamentary consultation or approval. It was introduced by Revenue and Customs to regulate its own business and nobody need answer for it—not even, as I shall demonstrate, to the adjudicator or the ombudsman.

COP 26 was concocted by the Treasury in October 2003 and was first published in December 2003. It was May 2004—a full eight months later—before even a flyer was produced for civil service public information. The full implication of COP 26 has been realised only since the Prime Minister’s undertakings and the resulting welter of claims concerning Revenue errors that were upheld. That cost the Treasury a lot of money.

In her report “Tax Credits: Putting Things Right”, the parliamentary ombudsman said:

“There are two main problems with the current system of recovery of both types of overpayment. The first is that it is instigated without any prior consideration by the Revenue of whether or not the sum in question is recoverable in accordance with COP 26. The second”—

which hon. Members may consider still more important—

“is that, in the case of recovery of excess payments in-year, it is done automatically without regard to customers’ financial circumstances and whether they can afford the recovery rate imposed.”

The conclusion of a stinging catalogue of criticism was the ombudsman’s comment:

“I recommend that consideration is given to the adoption of a statutory test for recovery of excess payments and overpayments of tax credits, consistent with the test that is currently applied to social security benefits, with a right of appeal to an independent tribunal”.

That is precisely what the hon. Member for Leeds, East was driving towards.

However, it was not done. The Chancellor of the Exchequer—the only Prime Minister in history to have failed even before taking on the job—who was responsible for the introduction and administration of tax credits, has chosen to ignore the parliamentary ombudsman. There is no right of appeal to an independent tribunal, no statutory test and no compatibility with the social benefits system. I do not want to reduce the Paymaster General to tears, but she heard that from me a couple of weeks ago. Indeed, in giving evidence to the Select Committee the deputy chairman of Revenue and Customs, who is apparently in denial, asserted:

“There is not a statutory right of appeal in relation to overpayments generated by official error”.

He has clearly not read section 12 of the Social Security Act 1998 which states:

“Where the Secretary of State has determined that any amount is recoverable any person from whom he has determined that it is recoverable shall have the right of appeal to an appeal tribunal”.

We shall, no doubt, be told that claimants have a right of appeal to the adjudicator, to the ombudsman and ultimately to judicial review. The latter is, of course, for the families that we are discussing, simply not a realistic or practical proposition. The adjudicator and the ombudsman have, I regret to say, been disgracefully compromised to the point where their findings no longer bear relevance to reality.

Instead of revising its systems to reflect natural justice and the spirit of the undertakings given by the Prime Minister, Her Majesty’s Revenue and Customs has chosen to re-interpret its own creation, COP 26, to which the hon. Member for Leeds, East also referred. Its key words are:

“For us to write off an overpayment you must be able to show that an overpayment happened because:

we made a mistake, and

it was reasonable for you to think your payments were right.”

A reasonable person might think that it was reasonable for a claimant who had provided the correct information at the correct time to believe that, given the battery of information technology and the veritable army of civil servants available to the Treasury, the calculations made by Revenue and Customs and, therefore, the payments based on those calculations, should be right. However, that is not the way that the Chancellor, the Paymaster General or the chairman of HMRC think. They have chosen to interpret COP 26 as saying, “We were wrong but you should have known we were wrong, so we are right and you are wrong and we demand our money back.” They have taken it as far as saying, in effect—I shall not bore you with it, Mr. Marshall, but I have a relevant case before me—“Our computer systems cannot handle your payment so we are going to make a manual payment; but our computer may make a duplicate payment, but we cannot tell you when that may happen, and if it does you will need to notice it and we will demand repayment.”

This is the world of Alice in Wonderland, and it would be amusing if it were not so tragic and if it had not compromised, hopelessly, the positions of the adjudicator, Barbara Mills, and the ombudsman, Ann Abraham. Correspondence from both of them, responding to challenges to HMRC decisions, now supinely reflects the HMRC position on COP 26. Dame Barbara says, for instance:

“When I consider complaints about the recovery of overpaid tax credits I do so in the light of Code of Practice 26”

and she usually continues to uphold the view of HMRC, which is:

“The conditions of COP 26 have not been met”.

In other words, the adjudicator bases her adjudication on the rules set down, interpreted and enforced by the body that is the subject of the complaint. When a matter is referred to the ombudsman, that august person says:

“I do not see the Revenue’s approach, as set out in COP 26, as being unreasonable”.

That is in spite of the “Tax Credits: Putting Things Right” report, which indicated that that approach was unreasonable and that there should be an appeal to an independent tribunal. The ombudsman and adjudicator appear for some reason to have allowed themselves to become the creatures of a self-created Revenue and Customs system that is unjust and is failing some of the most disadvantaged people in the country.

I want the Treasury to take certain immediate actions. The Paymaster General and I have discussed the matter and she has treated me most courteously at our meetings, but as the hon. Member for Leeds, East said, the right hon. Member for Manchester, Gorton (Sir Gerald Kaufman) would have demanded action, not trying—or even very trying. The Treasury must instruct HMRC to write off all overpayments to date except those arising directly and obviously from fraud—from the submission of deliberately false information—or from unacceptably late submission of the information needed to make calculations. The Treasury must accept the original recommendation of the parliamentary ombudsman and replace the office of adjudicator with an independent tribunal system comparable to that used to adjudicate social security benefits. The Treasury must accept the spirit of the undertakings given by the First Lord of the Treasury, the Prime Minister, renounce its future dependence on COP 26 and take full responsibility for future errors leading to overpayment. Finally, the Treasury should acknowledge that its chosen system has failed and abandon it in favour of either a flat-rate payment or a payment based on historical and actual rather than theoretical income.

I agree with a significant proportion of what the hon. Member for North Thanet (Mr. Gale) has said. I shall focus on two aspects of the matter: the human aspect and the technical and administrative aspects.

To start with the human side, we are dealing with a very well intentioned set of proposals. I share many of the views expressed by most hon. Members in this context: the intentions were good and the policy makes sense in broad terms. However, there was no reality check with regard to the likely customer base of the system.

I have found in the years of experience that we have had that commonplace events in modern life challenge the system and all too often cause it to fail. Relationship changes happen, and they can be frequent or confused, such as when someone is perhaps not quite out of one relationship but is moving into another one. We cannot be judgmental about that and we certainly cannot have a tax system that is judgmental about it, but it makes for considerable difficulty in communicating clearly a critical piece of information about household circumstances. There can be problems in defining the timeliness of the communication and making sure that it is conveyed accurately. The whole year picture must be considered, and I have had conversations with constituents who have said, “Do you really expect me to work out what this means in my whole year circumstances?” when they had a change of circumstances nine months into the year and needed to work out what it meant for the totality of the year, and whether it triggered the £2,500 disregard. The answer is yes, I do expect that, but one must be realistic. There are many people who would find it difficult to handle the process of accurately calendarising their circumstances when they changed during the year.

Job changes and changes in hours, such as a change from part-time to full-time work—things that happen in the real world—throw the system all too often, particularly when dealing with single women. Most of the cases that I come across tend to arise from relationship changes—they are common; changes in circumstances because of alterations in jobs, particularly changes in hours when someone goes from part-time to full-time; and people not communicating rapidly about a change of relationship because it was not yet fully established. All those things make it difficult for the system to work.

One particularly unpleasant case related to the abilities of the claimant. It involved a claimant with special needs whose family quite rightly wished him to be as independent as possible. He took the trouble to attend local Inland Revenue offices to seek guidance on the claim that he should submit; however, errors were made. He has been treated in exactly the same way as someone who has deliberately provided incorrect information. His family face the recovery of £13,000 because of errors that I regard as shared with local Revenue officials, who might have done their best to assist in a complicated case, but did so in error.

The hon. Member for North Thanet went over the reasonableness test thoroughly. To be quite honest, I probably get as many cases as he does. In one recent case, the Revenue readily conceded that it had made a mistake. It failed to respond to information that my constituent provided in a timely fashion. She rang up and reminded the Revenue, but it did not respond very quickly. Because the payment was made through an employer, the response to her change in circumstances was delayed, too, and a significant overpayment accumulated. She was not at fault, yet she now faces recovery of that sum, on the grounds that she should have spotted that the extra money was going into her account. She should have set that money aside and been ready to pay it back to the Revenue to compensate for its failings. Most people would say that that was not reasonable, that one would really expect a better performance from public officials and that she had done her best to communicate effectively with the Revenue to ensure that it had the correct information.

In another case, which is still unresolved and which directly mirrors a point that the hon. Gentleman raised, the Revenue made an error about four years ago, right at the start of the tax credits system. The case came up in a previous debate—indeed, my right hon. Friend the Paymaster General may even recall it, because she has heard me talk about it. The Revenue logged an employer on its system. The woman in question changed her employment before tax credits were even introduced, yet the record showed that she still worked at that place. Payments continued to be made through that employer for which she had never worked while tax credits were in place. She never received that money—I do not know where it went, and I am not even sure that the employer got it. However, the information has not been deleted and remains on the system, because there is still no software fix to remove erroneous historical data.

Periodically, that poor woman has to go through a recalculation, but when the results come back out of the system she is again confronted with the fact that an overpayment has been made. Her payments are adjusted to reflect that, but then there are manual payments and one has to tell her, “You’re going to get some manual payments, but beware. You may find that these manual payments will come back to haunt you, because you’ll start to get payments again through the computer system and you’ll be paid twice. So, be very careful.” I signed off a letter to her today saying exactly that. I must have written to her several times to say, “Yes, we’re sorting out a manual payment for you, but beware. You may live to regret it later, so be very careful”. Those difficulties of understanding people and understanding what seems fair are still present in a system whose overarching aims are entirely laudable.

I should like to comment on how the problems were dealt with at the start. Most, but not quite all, of the hon. Members present have been Members of Parliament since the inception of the system. At the start, the system was in utter chaos. The overpayments that were made during that period were dealt with under a regime that I would describe as desk clearing, which simply amounted to saying, “We won’t be able to perform our task if we have so many disputes in front of us. The easiest way to deal with these disputes is simply to concede them and move on.” In many ways that was an intelligent management judgment. One might wish that those circumstances had not arisen in the first place, but since they did, focusing on fixing for the future rather than desperately firefighting the past was probably wise.

However, that decision means that it is now open season for a legal challenge of comparison. Someone might say to the department, “You’re taking this set of rules”—COP 26, which we have discussed—“to deal with this particular overpayment, but previously under this regime you took a very different approach to very similar problems. Is that consistent, reasonable or fair?” I await a well resourced individual challenging the process at some stage, because that would an interesting case to have argued. The Committee tried to get a little more information about how those initial disputes were resolved. That information was thin in the extreme and rather confirmed what I have said, which is that a desperate desk-clearing job was undertaken.

I should like to discuss systems and how problems have arisen. As I said in my earlier intervention, I found our visit to Preston very informative—indeed, I was the one who suggested that we should go. However, several observations struck me. First, the people working there were decent people trying to do a job. That ought to be said straight away. It is easy to abuse people who have administered a system badly, but we met people who really were trying to do a decent job, but were confronted with a system that was designed to frustrate. They had abysmal management information. Getting a proper picture of the organisation’s customer base—who it was dealing with, what the common problems were, how they were being resolved, and so on—appeared constantly to require manual processes of counting, rather than saying straightforwardly, “We need this particular report about our system to tell us what’s going on.” As someone who managed a large organisation, I was stunned to find that the software on the system did not enable a suite of reports to be produced that would allow people to work out what was actually happening. I should say that designing the software was not done solely by a bunch of geeks employed by EDS; Her Majesty’s Revenue and Customs would have had a substantial role.

That problem was clear and it has a legacy. The hon. Member for Sevenoaks (Mr. Fallon), the Chairman of the Sub-Committee, spoke about compliance. Compliance is being dealt with through a risk-based approach, but to perform proper risk analysis, tools of analysis are needed. I would be fascinated to learn how appropriate targeting is done to identity the cases that require further scrutiny, given the management information that is available. I saw no evidence of a system that would have assisted exactly that targeting activity.

The second point that struck me on our visit was that the work force was organised in a way that the old management textbooks would have described as Taylorist. That means management simply identifying a particular function and saying, “First you do this, then you pass this paper to this person, who does something else. This bit of the computer screen you can see, but that bit’s too complicated, so someone else can deal with it”. In such a system the work force are treated as though they were ill-trained idiots who are just about able to do one or two simple tasks, but cannot deal with all of a customer’s problems. In the modern organisation, most people seek to avoid such systems. They certainly do not seek to design them, but that is what was done. The system was designed to parcel out functions and it prevented proper communication between those who were trying to solve a problem. We were struck by the number of little working groups that had to be set up. There was no way of seeing the whole thing. A particular case had to be referred to a particular group of people who could consider it specially, because that could not be done within the system. That is woeful.

Attempts have been made to remedy some of the problems, but it is startling that such a system was designed in the 21st century. It would have helped if there had been proper disclosure of the gateway process so that we understood the various tasks done by those auditing what was eventually delivered. I understand why that has not happened; there has, of course, been a dispute with EDS about the delivery of the systems. I would be surprised if it were in the interests of either party for there to be full disclosure of how the project was managed. That, however, leaves parliamentary scrutiny in a position of ignorance, guesswork, rumour and informal communication. I have had informal communication with EDS about its perception of some of the issues involved, and it has given me its own rather partial account of some of them.

My right hon. Friend the Paymaster General is a charming person to deal with, and she has also been extremely frank about some of the issues. It would be great if we had a transparent picture of what had happened and why. We may never have one because of the dispute; if so, our learning opportunity will have been shortened.

My hon. Friend the Member for Leeds, East (Mr. Mudie) referred to release discipline, and I shall give a commendation on that issue. The approach taken earlier in the process, when change requests appeared to be thrown almost at random at EDS to try to resolve the numerous problems identified at the start, is the route to further doom in software terms. If release processes are undisciplined, people fix one thing and then do another, instead of taking a total view of the system and deciding which parts are stable, which can sustain changes and which need further strengthening. To be honest, that is not the way to do it.

It is extraordinarily frustrating to people because change requests can sit for a long time and never feature in the priorities for future discipline. That is why during yesterday’s Sub-Committee sitting, I asked for a clear strategy for releases of new software into the system. It would be useful to know what disciplines are in place. I certainly commend the principle of having periodic releases rather than having them over random periods in an attempt to firefight.

I have said enough about those issues, to be honest. I would guess that 70 to 80 per cent. of those who claim in my constituency do so reasonably satisfactorily, without many hitches. It is frustrating to see wholly laudable objectives marred by entirely preventable errors and faults that affect a minority of cases.

Notwithstanding the hon. Gentleman’s laudable attempt to help the Minister along, may I ask him whether he agrees with the assessment of the hon. Member for Newcastle upon Tyne, Central (Jim Cousins), who said at yesterday’s Sub-Committee sitting, in the presence of all of us here, that

“under or overpayments of tax credits is a shocking, devastating damage to the whole welfare reform policy”

and that

“these administrative deficiencies have a major impact on the Government’s welfare reform policies.”?

My hon. Friend is much more a user of hyperbole than I. In parliamentary terms, I am at the boring end of the scale; I always have been and I accept it. I tend to consider issues in pragmatic and problem solving terms, so I do not entirely share those sentiments. The situation is recoverable.

I want to be clear. The hon. Gentleman is saying, then, that it is satisfactory that three of five people who receive tax credits—97 per cent. of people who earn less than £10,000 receive them—are either being paid too much or too little. Is the hon. Gentleman saying that that is not unsatisfactory?

I know that I did not say that. I wish that we had the tools to do deeper analysis; a little bit of that would almost certainly show that a significant proportion of those who are underpaid and overpaid handle that circumstance perfectly competently and that it is part of their normal lives. For example, if someone gets a pay increase during the year, that is a laudable thing, their circumstances change and they cope with it. They deal with the underpayment or overpayment and anticipated it happening. We are talking about a smaller community of people, who genuinely cannot cope with that situation. I do not think that the problem is on the scale that the hon. Gentleman identifies and the one that my hon. Friend the Member for Newcastle upon Tyne, Central (Jim Cousins) talked about in those terms yesterday.

Indeed it does, but as I said, it cites a figure that does not identify the harm that that figure causes.

May I help my hon. Friend? The Department then publishes data by income range and by how much the overpayment is. The point being advanced is that we could drill down deeper into those statistics. Actually, the general proposition is incorrect and it shows a different picture entirely.

Indeed; it is fair to say that my speech has not been uncritical of the Government, but I am discussing a smaller group of people. If the problem were on the scale that the hon. Member for Braintree (Mr. Newmark) has talked about, all our constituency surgeries, e-mail systems and correspondence would be clogged on the subject. I agree that they are burdened, but on the basis of the rule of thumb of how often people are in touch with me, I honestly do not think that he has given an accurate reflection of the harm.

My right hon. Friend—and she is my friend; we have talked about this subject many times—the Paymaster General can offer further hope of further improvements to the system. My hon. Friend the Member for Leeds, East correctly said that there had been improvements; I have noticed that from my case load, and the hon. Member for North Thanet made the same point. Even from his perspective, the number of calls for his assistance has declined. There has been progress, but more is required.

It is a pleasure to serve under your chairmanship, Mr. Marshall.

Like a number of my colleagues on the Treasury Committee, I should like to return to one or two issues that that we discussed as we took evidence in yesterday’s Sub-Committee, in which the Paymaster General answered our questions.

I raised issues that relate to the package of measures announced in the 2005 pre-Budget report and asked questions about the disregard, which was increased from £2,500 to £25,000. We discussed the various estimates of the cost of that. Essentially, there are two types of cost: the Exchequer effect, estimated at £850 million over five years by the Treasury, and the somewhat higher effect on entitlement described by the National Audit Office as the full effect of the changes, but over a longer period. The Treasury figure is £500 million per year and that is supported by the National Audit Office, which talks of a range of between £400 million and £600 million. There is no disagreement there.

However, the Treasury Committee has received evidence from Mr. Roger Cockfield, who gave a rather tentative estimate of the cost. His estimate is somewhat higher, at three times more than £500 million.

I want to make it clear to the hon. Gentleman, in case he is not aware, that the evidence submitted in writing to the Committee is not forwarded to me. He is referring to stuff that I have not seen and therefore cannot comment on. The only two submissions that I saw, in cases when the organisations sent them to us, were from the Public and Commercial Services Union and the National Audit Office. All other submissions are ones that I have not seen. I am sure that the hon. Gentleman will send it to me, so that he can have a proper answer to his question.

The Paymaster General has jumped in. She will find that at this stage of my speech, at least, I will be entirely reasonable. Not only was I not in a position to judge whether that figure was correct, but I have been careful to state that the National Audit Office has supported the Treasury’s position. None the less, we have received that evidence, and I was going to ask the Paymaster General whether I may write to her so that she can respond in due course. I have no doubt that she will disagree with the assessment, but it would be helpful for all members of the Committee to have that on record so that we understand precisely how those figures are reached.

Just to ensure that we have the etiquette right, I would write in response to that letter to the hon. Member for Sevenoaks (Mr. Fallon) and it would then be circulated to the members of the Committee.

I am grateful to the Paymaster General for her assistance in etiquette.

Let me move on to another issue that arose yesterday, again in relation to the measures for the 2005 pre-Budget report. Last year’s PBR estimated that the cost of tax credits would fall ever so slightly. I asked the Paymaster General why. We have heard from my hon. Friend the Member for Sevenoaks that there is a perception, which I think is widespread, that there will be a fall in the cost of tax credits because, on appeal, the HMRC appears to be taking a tougher line. The Paymaster General’s explanation yesterday was somewhat different, and she referred to the

“shorter window for notifying change of circumstances and the other issues around that”.

I press the Paymaster General to outline the details of her calculation about the areas of saving, if not today, then in the fullness of time. We now have details about the additional cost of the disregard, but it would be helpful if the Committee had greater details about the savings that were made by the various reforms.

I return to the evidence that the Paymaster General has not seen which was provided by Mr. Cockfield. He raised a point about the risk of fraud, and that specifically that more people might wrongly claim to be lone parents, which would be accentuated by the change in the disregard. Essentially, his argument would be that if one is a lone parent and enters into a relationship, the improvement in financial position over the course of that year would be more likely to be disregarded under the reformed system. The incentive in the following year to announce that they were still a lone parent might be stronger.

There is historical evidence that many people claim to be lone parents when they are not. I refer to the press release issued by the Institute of Fiscal Studies in March 2006, which states:

“The Government thinks it is paying out tax credits or out-of-work benefits to around 200,000 more lone parents than the Office for National Statistics estimate live in the UK”.

It goes on to state that

“it is often financially worthwhile to pretend to be a lone parent”.

The hon. Gentleman is entering an important part of the debate. Is he aware that in addition to the report to which he refers, the charity Christian Action Research and Education has published a report that examines the question of incentives in the tax credit system for living alone or as a couple? CARE argues strongly for clear disincentives in the tax credit system against people living as couples. Is not that a negative part of the system that needs to be considered?

The hon. Gentleman makes an important point. A presentation to the Institute for Fiscal Studies made by Don Draper and Leonard Beighton in September 2005 made much the same point. That is quoted in Nicholas Boys Smith’s work on “Reforming welfare”, which was produced for the Reform think tank. The hon. Gentleman makes an important point about the tax credit system as a whole.

Let me return to the point about fraud, as it might be called, and the inaccurate figure for lone parents. One of the understandable arguments used by the Paymaster General is about the impressive take-up figures that often apply to tax credits, at least in respect of the amount claimed, if not to the numbers of claimants. If the take-up figure among lone parents is somewhat more than 100 per cent., that brings into question the veracity of those take-up figures.

But the evidence from the IFS would appear to bring into doubt at least some of the take-up figures, although there might be a technical explanation for that. If there is, I look forward to hearing it.

The take-up figures were used by the Paymaster General a week or so ago in the debate on the uprating of tax credit benefits. She used it to dismiss the argument of the hon. Member for Yeovil (Mr. Laws), who claimed that he regularly dealt with constituents who were tempted not to take part in the tax credit system because of the difficulties of overpayment. The Paymaster General was characteristically forthright and said that it was an extraordinary claim. The evidence that has been presented to the Treasury Committee suggests that the hon. Gentleman might be on to something. Citizens Advice gave evidence that states:

“We are seeing a steady stream of clients whose bad experiences of tax credit overpayment recovery are causing reluctance to continue with their claim. Others have heard about problems and do not want to claim at all.”

The Paymaster General might not recognise the problem, but it is recognised by that organisation and by other MPs.

Official error was an important part of the Committee’s report in June 2006. Given that the Committee is a cross-party body with a majority of Labour MPs, it was extremely critical of the evidence given by the Paymaster General and her officials. In paragraph 28, we stated:

“The factors cited by the Paymaster General and her officials as contributing to the problem of overpayments do not appear to us to give a comprehensive account of the reasons which overpayments have arisen…it is obvious to us that the Paymaster General’s account makes no reference to causes of overpayments which have arisen as a consequence of the Department’s own processes”.

In paragraph 31, we stated:

“It is clear that official error has been a cause of overpayments in a significant number of cases”,

and in paragraph 35, we stated:

“The Paymaster General has said that no complete analysis exists of official error causing or contributing to overpayments. This is a significant gap in HMRC’s understanding of the reasons why overpayments arise. If HMRC is to succeed in improving the administration of the tax credits regime, the first thing it needs to understand is what is going wrong within its own processes, before it looks to problems elsewhere.”

What progress has been made since June 2006? We learned yesterday of a pilot scheme that reviewed a small sample of disputed payments. It is to be expanded for all disputed payments from April. The hon. Member for Newcastle upon Tyne, Central (Jim Cousins) made it clear in forceful terms, as I am sure the Paymaster General will recall, that that is still some way short of the procedures undertaken by the Department for Work and Pensions, which, as we heard from other hon. Members, produces an estimate of fraud, customer error and official error for every benefit based on all cases, not just those where a dispute has arisen. Pressed by the hon. Gentleman about whether such figures should be produced, the Paymaster General stated that

“there is no reason why we should not be able to do that and we will look at doing that.”

That is progress.

We have a sample, and it revealed a 5 per cent. official error rate in respect of overpayments. This seems to me a significant figure. If we look at the disputed overpayments that have been written off as well, and also that 5 per cent. figure, we see something quite striking. The percentage of disputed overpayments for 2005-06 was 44 per cent. For the 2006-07 year to date, it has fallen substantially to just 3 per cent. When asked about that, an official replied that

“the cases we were dealing with in 2005-06 largely related to the very early days of the system…in the very early days of the system, regrettably, we were making a lot more mistakes and therefore a lot more of those disputes were justified”,

and therefore overpayments were written off. The official also said that

“our current accuracy rates are much better and the level of mistakes is a lot smaller.”

That would appear to be good news indeed, but the implication is significant. If the improvement in the size of amounts that are written off is because there has been a substantial reduction in official error, which was the evidence that we heard yesterday, and if the amount that is written off has gone from 44 per cent. to 3 per cent. and we now have a level of accuracy that is 5 per cent. of disputed payments, it begs the question as to what the level of inaccuracy was when the amount written off was up at 44 per cent. It almost suggests, if the problem was purely down to official error, that the level of official error for the cases that were examined in 2005-06 would be about 44 per cent., and possibly higher.

There may be other explanations. We could be talking about desk-clearing, as the hon. Member for South Derbyshire (Mr. Todd) said, but we are talking about 2005-06, not the dim and distant past. The explanation might be in the argument that my hon. Friend the Member for Sevenoaks made about a toughening up of the appeal process, but the officials said yesterday that it was a matter of improved accuracy rather than less official error. If that is the case, the historical levels of official error were very high, which brings us back to the criticisms that were made by the Treasury Committee in June 2006. They were not only justified but relatively mild and restrained.

The Committee stated:

“It is obvious to us that the Paymaster General’s account makes no reference to causes of overpayments which have arisen as a consequence of the Department’s own processes”.

It is outrageous that no reference was made to official error when the figure, at least as the evidence appeared yesterday, could be up by 40 to 50 per cent. When the Committee said that it was clear that official error had been a cause of overpayments in a significant number of cases, it was an understatement.

It is extraordinary that the Paymaster General said that

“no complete analysis exists of official error causing or contributing to overpayments”,

because if the level of official error was as high as I suggest, or as the evidence that we received yesterday seems to suggest, it beggars belief that there was no complete analysis of official error and the role that it played in overpayments.

At times, there have been allegations of secrecy when it comes to the tax credit issue. Sometimes it is difficult to get information on it. I know that complaints have been made about the fact that the Social Security Advisory Committee reports on tax credit administration are not published, and that parliamentary questions are not always answered, but I do not think that that is the problem in this case. There is simply a failure to try to get to the bottom of the problem of official error. Only now is that being addressed, and I believe that it is because of the work of the Treasury Committee that that is being achieved. Because it has been such a large problem for such a long time, it appears that there has been a failure of leadership in Her Majesty’s Revenue and Customs and in the Department. It is right for us to highlight it, because it is an enormous problem that has caused enormous hardship to many of our constituents throughout the country.

Order. It may help if I intimate to Members that, following the speeches of the Front-Bench spokesmen, the Chairman of the Treasury Sub-Committee and initiator of this debate may have a few minutes, if he so wishes and with the leave of the House, to respond to the debate.

It is a pleasure to serve under your chairmanship, Mr. Marshall. It is the first time that I have served in Westminster Hall with you in the Chair.

I pay tribute to the hon. Member for Sevenoaks (Mr. Fallon) for the way in which he set out the powerful conclusions that the Select Committee put in its report, which it seems was published quite a while ago—it was ordered to be printed in May 2006. As has been said, a lot of water has flowed under the bridge since then, not least the figures for 2004-05, which I believe came out about a week after the report was published. We look forward later this year to the figures for 2005-06.

One of several strange points about tax credits is that it seems to take a long time to get annual information out. The hon. Member for South-West Hertfordshire (Mr. Gauke) made that point.

Given that the report includes information that cannot be assessed until the year is completed, and information about self-employed people that cannot be completed until the end of the self-assessment period, which has a different time period, will the hon. Gentleman explain exactly how we can get the information apart from using real data when they are available?

I am grateful for that intervention. [Interruption.] As the hon. Member for North Thanet (Mr. Gale) says, that is one of the flaws in the system. It is hard to keep track of what is going on because it takes such a long time to get information out.

Is the hon. Gentleman suggesting that we should have not a flexible system but a fixed one with a shorter time period?

I am suggesting that, and I shall come back to it.

It is important to say at the outset that the idea of a tax credit system that boosts incomes of low-income families, relieves child poverty and makes work worth while—makes it pay—is a good one. Liberal Democrats support such a system and wish to ensure that it works effectively. Indeed, it is precisely because of those important social objectives that the tax credit system seeks to serve that the problems with it generate such anger and frustration, some of which we have heard about today. Liberal Democrats share the frustration and irritation that a system that promises so much causes so many problems for a huge number of claimants.

We have heard examples from constituencies across the country. Those suffering from overpayments might or might not be in a minority. The Paymaster General has often pointed out that they are a minority, but the hon. Member for Sevenoaks pointed out that some 60 per cent. of claimants had, in his view, suffered overpayments or underpayments, in which case we are actually talking about a majority. The Paymaster General may wish to dispute that.

It is clear from having read the report—couched though it is in the most moderate of parliamentary language—that members of the Committee share the anger and frustration felt by those constituents adversely affected. The report makes it clear that, over the past year, progress in many areas has been inadequate. It states that

“we are not convinced that the Paymaster General and the Department fully realise the extent to which HMRC needs to re-focus its administrative structures…around the needs of claimants.”

That is the real issue: the needs of claimants.

As we have heard, overpayments cause hardship, and the case research highlighted by the Committee shows how the incomes of low-income families are highly volatile. In a third of the cases that the research looked at, tax credit awards and the overpayments that followed made the incomes of those families more volatile. As the Committee said, those findings suggest that the tax credit scheme

“could be aligned more closely to the financial needs of such families”.

For families who budget weekly or monthly, the financial roller-coaster that overpayments cause undermines, in some cases, confidence in the system itself. The hon. Member for South-West Hertfordshire made that point as did my hon. Friend the Member for Yeovil (Mr. Laws).

I and many hon. Members will have tried to persuade constituents who are dissatisfied by how the system has treated them to stay in the system. Of course, people should stay in the system to receive the financial support to which they are entitled. However, we must be frank about the impact that such changes—the overpayments and fluctuations—have had on our constituents, particularly on the confidence that some people have in the system.

The report makes important criticisms of the system. It was published following the important report of the ombudsman, as made clear by the hon. Member for Sevenoaks. As far as we can establish, only four out of the 12 recommendations made by the ombudsman in the “Tax Credits: Putting Things Right” report have been accepted and implemented. Despite a number of attempts, including written parliamentary questions, I have not had a clear answer from the Paymaster General on the following points: how many of those recommendations have been implemented and which ones are they; how many have been rejected and why; how many of those not implemented does she plan to implement; and when does she plan finally to bring the implementation of those important recommendations to fruition?

The most important of those recommendations have not been acted on. For example, it is recommended that when there is an alleged overpayment, the claimant is sent a letter clearly stating how the overpayment occurred. That would give time for a challenge to be made before the recovery of the overpayment. The letter should also clearly set out what right of appeal exists. At present, such letters are, at best, uninformative.

As has been made clear by a number of hon. Members, there should be a statutory test for the recovery of overpayments consistent with the social security benefits test. There should also be a right of appeal to an independent tribunal. Under the social security benefits test an overpayment must only be repaid if the claimant has misrepresented or failed to disclose a material fact. It is unreasonable to expect the claimant to be responsible, as the current system implies, for identifying errors on behalf of Her Majesty’s Revenue and Customs. The system assumes a higher level of knowledge about how the tax credit system operates than it is reasonable to expect most claimants to have. In that, I agree with the remarks of the hon. Member for North Thanet.

The situation is worse than that. Is it not a case of Revenue and Customs saying, “We can’t get it right, but despite that we expect you to get it right without the information that we have got”?

That is absolutely right and cuts to the point made in the report about the culture within the department. After all, an official error, computer error or transcription error made over the telephone only has consequences for the claimant and if they fail to spot it, they will eventually have to pay the money back. That seems a hard system indeed and one that has little sensitivity towards the needs of claimants or the ability of claimants to understand and peruse what, even with the minor improvement made to award notices, are complicated letters and systems to understand.

Does the hon. Gentleman agree that although some additional information has been provided on award notices—I emphasise the word “some”—a particular weakness is that when people receive a demand for overpayments, little information is given? Usually people are simply informed of the amount that they must pay back, which often causes panic and means that they get on the phone to the tax credits office and confusion is multiplied. Would it not help if people were given a clear breakdown of an overpayment and why it has occurred? They could then straight away work out whether or not to challenge it.

I agree. I made that point and attention was drawn to it in the report. It is important that people understand the reasons for an overpayment and, as mentioned but not yet implemented, there should be a pause so that people have time to reflect on their situation and decide whether to challenge an overpayment. As it is, the process could be a long way down the road before people decide on a course of action. Given the experiences that people have had, it is somewhat surprising that they still have faith in the HMRC and believe that if they get a letter from Revenue and Customs, it is likely to be accurate. Although people’s experience may be somewhat to the contrary, they still believe that and therefore will not challenge the claim of overpayment unless repaying it causes them such hardship that they are forced to go to see their local MP, citizens advice bureau or other local advisory agencies. Such agencies would then perhaps provide more details and support them in appealing.

HMRC should reverse the burden of proof where the error has been caused by HMRC itself—a point also made by the ombudsman. The assumption should be that an overpayment is not recoverable unless it is reasonable to think that it would have been clearly obvious to the claimant. That is what claimants find most frustrating: that the burden of proof is on them. People may have phoned the tax credit helpline and given precisely the right information about changes in circumstances at the right time and in the right way, but even though they have done all the right things and the error was an official mistake, an IT system problem or some other cause that was clearly not the claimant’s fault, they are still asked to pay it back. I have had cases like that and I am sure that other hon. Members have too. To many of my constituents that seems utterly unfair.

What does such a situation mean for the culture of HMRC? Errors made in transcribing content or resulting from poorly operating IT systems have no consequences at all for the management or staff concerned. They only have consequences for the claimant. Clearly, improvements need to be made at an official level and I know that some have been made.

Let us consider the IT system. In the evidence given to the Sub-Committee yesterday, the director of benefits and tax credits at HMRC stated:

“The IT system is working well”,

but that

“There are the problems with introducing the restricted recovery of overpayments”,

which are currently dealt with in “a semi-manual process”. She goes on to state that a fully automated system will be brought in by June. That analysis of the IT system is not consistent with my experience when dealing with constituency cases. I have had many cases resulting from technical problems. In one particular case from last May, I was told by HMRC that technical problems resulted in an apparent clerical error in connection with the declaration form. The original application was made online and was stopped, payments were stopped and an error resulted. After considerable chasing and seven months after my original letter to HMRC, I received a reply that closes with the following sentence, which puts into perspective some of the points made by hon. Members:

“in order to closely monitor your constituent’s claim, we will continue to monitor their claim and will let you know when the problem has been resolved”.

That does not suggest a system that is on top of the technical problems that have been described.

Hon. Members also spoke about staff training, a subject that was mentioned in the report. The point was rightly made that it is of benefit that recordings of phone conversations are now being made available to claimants. Despite the best efforts of HMRC staff in call centres and so on, it is obvious that many staff either do not understand the full system or, as was made clear in the report, are responsible only for a fairly narrow part of the system and have no reason to understand the rest of it. As a result, the advice offered or the questions asked do not always give the full picture or say what factors might affect a claimant’s circumstances.

For example, I listened to a call last night about a case in which I am involved. The question of whether a child had reached the age of 16 was in dispute, so the claim had automatically been stopped. Only after several minutes of discussion, and incomprehension on the part of my constituent, did it became clear that the child was still in full-time education, at which point the tone of the conversation changed entirely.

Helpline operators also need to track the progress of individual cases, a point also made in the report. The Government’s response said that that facility would be in place by October. Is that still on track, so that helpline operators will be able to keep track of cases in the system?

Local face-to-face contact is important, a point made by the hon. Member for Leeds, East (Mr. Mudie). It could be of benefit to claimants, particularly in the most complicated cases and the most difficult situations. I am concerned that the reductions in the number of HMRC staff will make matters worse. Representations have been made to me by people who work in the HMRC offices in Inverness. They are worried that plans to reduce the number of staff by nearly 50 per cent. will affect the quality of service available to people in the highland and islands.

I give the hon. Gentleman an absolute assurance: no HMRC inquiry centre—they are sometimes called contact centres—that is currently open will do anything else but stay open. If anyone suggests to him that a centre will close, they are giving him the wrong information. The face-to-face contact that exists now will continue, and not only on tax credits.

I am grateful for that reassurance. I shall certainly relay it to the staff I met, and follow it up, perhaps engaging in dialogue with the Minister or her Department on the subject.

I have written to the Paymaster General on the subject. As I am awaiting a response, she now has more information with which to fill it out. I look forward to receiving it.

It is also right to say, as several other hon. Members have done, that the appeals process, such as it is, seems to have become increasingly tough. The Treasury is getting tougher with disputed overpayments, which is causing even greater hardship. The Committee reported receiving evidence that the process had become more “harsh and exacting”. The process was streamlined, and then the streamlining was stopped.

Various interpretations have been offered to explain that, but the fact remains that a rate in 2005 of more than one in every two disputed overpayments being written off has fallen to a rate of one in every 25. In 2006, 350,000 claims were disputed and only 14,000 were written off, compared with 162,500 in 2005. That is a huge difference, and I would be glad to hear a little more about the reasons for that.

A number of hon. Members mentioned the risk that all those things could have an impact on wider Government policy, particularly on welfare reform and welfare to work policies. It will not encourage people to return to work if they believe that work will not pay. The financial advantage arising from earned income may be overshadowed by the problems caused by the alteration to tax credit awards because of higher income and increased hours. Although tax credits provide an incentive for people to find work, the high marginal deduction rates that arise when the tax credit system is combined with the benefit system can lead to a disincentive to work longer hours or to get better jobs for some groups of claimants.

In some cases—these figures come from tables published by the Department for Work and Pensions about the interaction of the tax and benefits systems—people can face marginal deduction rates of 90 per cent. and more, which means that for every extra £1 people earn, they keep only 10p. [Interruption.] The Minister can consult the tables, which makes the point clear. It must be a serious worry that overpayments will counteract the incentive for people to return to work. High marginal deduction rates will also reduce the incentive to change jobs to earn a better salary, if people are worried about the sort of trouble that their awards will cause.

The Committee highlighted at several points in its report the difficulties that it had in obtaining up-to-date, accurate and timely information from the Treasury. Many hon. Members will have had the same sense of frustration with parliamentary questions. However, there is one area where a big improvement could be made. It is totally unacceptable that all Social Security Advisory Committee reports are published except those that scrutinise Her Majesty’s Revenue and Customs reports on benefits such as child benefit and tax credits. The Treasury continues to deny public access, and it continues to deny Parliament access to those reports. Will the Paymaster General ensure that it happens? If it requires a legislative change, will she ensure that her ministerial colleagues in the Lords table an appropriate amendment to the Welfare Reform Bill, which concerns matters relating to the Social Security Advisory Committee, so that the change can be made as a matter of urgency?

The Paymaster General, in one of her interventions, asked about the reforms to the system proposed by the Liberal Democrats. I shall refer to them briefly, Mr. Marshall, while not wishing to test your patience unduly. A case can be made for a return to a system of stable awards—perhaps six-monthly fixed awards—to help end the instability and chaos that some experience under the current system. The ombudsman noted that the instability of the system raises the fundamental question that, for people on modest incomes who have to budget and plan their finances carefully in order to manage their lives, such inbuilt uncertainty or instability rarely works. Of course, such a system could be designed to build in some degree of downward protection, but none the less I believe that a system of fixed awards would offer a great deal more reassurance to many claimants.

Clearer and simpler award notices must be an important part of reform. Progress has been made, but a great deal more could be made. Likewise, action against organised crime remains a problem. In that respect, publishing clear information on fraud and error in the tax credit system would be a major benefit. I gather from the remarks of the hon. Member for South-West Hertfordshire that the issue was referred to yesterday. I hope that the matter will be pursued by the Committee as assiduously as it has pursued other matters.

Most important, however, we need an immediate end to what the ombudsman called the “systematic maladministration” that has beset the tax credit system. We want an end to automatic recovery without checking if the overpayment is recoverable—that is the pause. We want a statutory right of appeal against overpayments, with all that are due to official error being written off—a key recommendation of the ombudsman. We want to improve the tax credit IT system and to overhaul the automated payments system, which has led to considerable failures, often resulting in the need to make costly manual payments.

With those reforms we can achieve those worthwhile objectives, which are shared by all hon. Members, of having a tax credit system that boosts the incomes of low-income families, creates greater incentives to work and relieves child poverty. The system achieves that for many people. For it to achieve that for the entire claimant population, a thoroughgoing and radical reform is needed.

It is a pleasure to serve under your chairmanship, Mr. Marshall. It is also a pleasure, as always, to be opposite the Paymaster General. We have debated tax credits on a number of occasions since I began shadowing the right hon. Lady in 2005. This afternoon, in the words of Yogi Berra, the American baseball player, is déjà vu all over again.

Our debate is informed by the Treasury Committee report on tax credits administration and by the Government’s response thereto, which appeared in June 2006 and November 2006 respectively. The Committee report was introduced if I may say so very ably this afternoon by my hon. Friend the Member for Sevenoaks (Mr. Fallon).

The debate is timely in the light of the Treasury Sub-Committee having taken further evidence from the Paymaster General only yesterday—evidence to which I shall refer in the course of my remarks. The Committee report points out that the tax credits system faces a number of problems, such as IT systems error, the level of overpayments, the recovery of overpayments, fraud, error and organised crime, and even the availability of information about the tax credits regime as a whole. I shall refer to a number of those issues as well.

One of the problems that has dogged the tax credits system is the unreliability of the associated tax credits IT system which has been highlighted previously by the hon. Member for South Derbyshire (Mr. Todd), whose expertise in such matters the House would acknowledge. Unfortunately, the complexity of the system devised by the Chancellor of the Exchequer, combined with the historical unreliability of the associated computer, mean that mistakes in the system are now legion. That is partly why Her Majesty’s Revenue and Customs sacked its IT contractor, EDS, and brought in another contractor, Cap Gemini, to try to salvage the whole complicated process.

Independent commentators have made a big issue of the IT problems. Robert Chote and Michael Brewer of the Institute for Fiscal Studies pointed out in a newspaper article in September 2006 that:

“A combination of IT problems, an overly complicated design, and the inability of many families to provide information to the Revenue as quickly and accurately as expected has meant around £2bn a year has been handed out in overpayments. Not all of these overpayments were mistakes. But they lead, at best, to inconvenience and at worst to anxiety and real hardship. Some recipients have had no idea when they were being deliberately overpaid. Often cash-strapped households, they simply spent the money they had been given—and then became distressed when they were required to pay it back.”

If, as Ministers like to claim, the computer system is now stable, why did the Paymaster General issue a written statement to the House last December that said that further anticipated changes that should have gone ahead, including the migration on to the tax credits system of jobseeker’s allowance cases involving child tax credit, had been delayed yet again? That subject cropped up in yesterday afternoon’s proceedings.

According to a recent series of parliamentary written answers, the Treasury’s IT systems as a whole are now running a combined total of some 17 years late. For the Department charged with the ultimate protection of public funds, that is clearly highly embarrassing. The IT system problems have presented a major problem in relation to tax credits in particular, and they continue to do so.

A further major drawback of the tax credits system as it is currently configured is its inherent complexity. That complexity partly results from the fact that the Chancellor, whose personal brainchild the system was, is by nature an inveterate lover of complexity. We should like to debate the system with the Chancellor himself one day, but when it comes to debating tax credits the Chancellor is like Macavity—he is never there.

The figures are quite stark. The latest year for which we have fully audited figures from HMRC is 2004-05. Of the slightly more than 5 million families in the United Kingdom who were claiming tax credits in that period, almost 2 million were overpaid and more than 900,000 were underpaid. In other words, more than half of all the payments in the entire system were wrong.

In 2005, the Parliamentary Commissioner for Administration issued a detailed examination of the weaknesses of the tax credits system, entitled “Tax Credits: Putting Things Right”. That report stated:

“A heavier burden was placed on customers than was reasonable to spot the wide variety of mistakes and omissions which occurred as a result of processing faults.”

The commissioner attributed that to, among other things:

“customers’ unfamiliarity with the new system”—


“its sheer complexity—particularly when customers’ circumstances change”.

No doubt when the Paymaster General winds up she will seek to argue that, two years on, to coin a phrase, “Things can only get better.” According to the Government’s reply to the Select Committee report, however, in the year 2005-06, 367,500 people appealed against an attempt to recover overpayments by HMRC. That means that more than a third of a million families were having very real difficulty with the tax credits system. That statistic rather belies the Paymaster General’s frequent claims that the problems in the system are isolated and infrequent.

It has fallen to individual constituency MPs and organisations such as citizens advice bureaux to try to pick up the pieces. According to a memorandum that Citizens Advice submitted to the Committee, citizens advice bureaux dealt with 153,000 queries in 2005-06 and with a further 90,000 in the first six months of 2006-07.

The hon. Gentleman rightly draws attention to the important role of citizens advice bureaux in dealing with complaints under the tax credits system. It is worth noting also that they do not receive specific funding for their work on tax credits over and above that which they already receive.

Citizens advice bureaux do receive funding from the Department specific to their tax credits work, and I shall refer to the further work that we are doing with them when I respond to the debate.

I entirely accept the Paymaster General’s word on the matter, although I must say that my local CAB has never told me that it was getting an HMRC grant. We have heard much about etiquette this afternoon, so perhaps the Paymaster General will write to all hon. Members present and tell us exactly how much money each of our respective citizens advice bureaux are getting to assist with tax credits problems. That should clear the matter up.

The CAB memorandum to which I referred said:

“We are seeing a steady stream of clients whose bad experiences of tax credit overpayment recovery are causing reluctance to continue with their claim. Others have heard about problems and do not want to claim at all.”

It continues by saying that people are

“simply worn down by trying to resolve administrative problems.”

Those problems were ably outlined by my hon. Friend the Member for North Thanet (Mr. Gale), who I believe even the Paymaster General would acknowledge to be something of an expert on the whole system.

Partly as a result of all the problems, the Treasury announced in the 2005 pre-Budget report a package of alterations to the tax credits system that is now usually referred to as the PBR package. The package comprised several elements, such as early reporting of changes in claimants’ circumstances. Chief among the proposed measures, however, was the decision radically to increase the so-called income disregard—the amount by which a family’s income can increase within a year without that family’s payments being affected—by a factor of 10. The income disregard was raised from £2,500 to £25,000, which is a very considerable increase. The measure was itself very expensive—a point touched on by my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke), who introduced some new information to the debate. When he receives his letter from the Paymaster General, perhaps he will be good enough to share it with me, because I should like to see her response to the analysis.

Last year, the Treasury attempted to argue that it could not successfully disaggregate the cost of the increase in the disregard, because that cost was too closely entwined with the other elements of the package. However, after persistent questioning, it relented and decided that it could do so. On 7 November 2006, I was told in a written answer from the Paymaster General that the cost of the tenfold increase in the disregard from the financial years 2006-07 to 2010-11 was likely to be £850 million. However, the acting chairman of HMRC, Mr. Paul Gray, had previously told the Select Committee on Public Accounts, on 23 October 2006, that the cost of the measure could be about £500 million a year—a far greater figure. Indeed, in evidence to the Treasury Committee yesterday, the Paymaster General’s officials revealed that the cost of the disregard alone could well reach £500 million per annum in subsequent years. There is considerable doubt, therefore, about whether the cost of the tenfold increase will be £850 million or whether in the event it will cost the taxpayer much more than that.

The cost is very important, because the PBR package is meant to be broadly revenue neutral over the next several years. To make the numbers balance, therefore, HMRC has taken a much tougher line on the adjudication of overpayments to make up for the increased cost of the other elements of the package. That matters to every Member of Parliament who deals with tax credits in the course of their casework, because the higher the cost of the tenfold increase in the disregard, the tighter HMRC will have to rule on appeal against recovery of overpayments—in layman’s terms, the harsher HMRC will have to be to make the numbers add up.

Indeed, that process appears to have begun in earnest. A number of hon. Members touched on that. There is considerable anecdotal evidence from citizens advice bureaux and from hon. Members’ constituency correspondence and surgeries that in the past year the number of appeals being upheld has suddenly dropped off dramatically—and now the official figures bear that out. In 2005, in some 46 per cent. of appeals against recovery of overpayments, the overpayments were eventually written off, whereas in 2006 that figure fell to under 4 per cent.—a massive drop.

At Treasury questions on 1 March 2007, when the Paymaster General was pressed on the number of overpayments that were now being written off, she said that in the period from April 2006 to January 2007, of 303,000 disputed overpayments, 8,600 had been written off, which by my maths equates to some 2.8 per cent. In the real world, families are being squeezed to pay for the Paymaster General’s desperate attempts to put the system right.

We must also remember that HMRC acts as judge and jury in such cases—a point effectively made by the hon. Member for Leeds, East (Mr. Mudie). There is no independent appeal to a tribunal as there is for Department for Work and Pensions cases. In the vast majority of instances, HMRC itself rules on whether it was right or not and, not surprisingly, it tends to rule that it was correct.

Tellingly, one of the Paymaster General’s officials admitted yesterday that claimants often have trouble understanding their tax credit awards. How can claimants be accused of having failed to notice that they were being overpaid when HMRC admits that many claimants do not understand what they are receiving in the first place? If people genuinely have difficulty working that out, how can they reasonably be expected to calculate whether they have had too much or too little? That is an absolute weakness in the very complicated system that the Chancellor of the Exchequer has devised.

The Treasury must be taking a harsher attitude towards overpayments. If we look at table B16 of the pre-Budget report 2006, which is headed “Total managed expenditure 2005-06 to 2007-08”, under the line item for tax credits we see that the outturn figure for 2005-06 was £15.4 billion, the estimated outturn for 2006-07 was £16 billion and the projection for 2007-08 was £15.8 billion—in other words, a decline of £200 million from 2006-07 to 2007-08.

My hon. Friend the Member for South-West Hertfordshire mentioned that we recently debated a statutory instrument to uprate tax credits for the new financial year—the draft Tax Credits Up-rating Regulations 2007. In respect of those regulations, the total cost of the uprating, as given to the Committee and, if I remember correctly, contained in the explanatory notes, was £990 million—a fraction short of £1 billion. In simple terms, the actual cost of the outgoing payments to claimants next year will go up by the best part of £1 billion, yet the total cost of the system, according to the PBR, will fall by £200 million. On top of that, we have to add the increased cost of the income disregard.

It seems to me that the only way in which the Treasury can attempt to make everything balance out is to take a much harsher view on the judgment of appeals against the recovery of overpayments. The fact that we have gone from almost one in two appeals in which the money is waived to fewer than one in 20 bears that out. Ordinary families are paying for the Treasury’s and HMRC’s mistake.

The scale of overpayments has become a source of irritation to many Labour Members of Parliament as well. When I debated the regulations on the uprating of tax credits on 8 March, the hon. Member for North Durham (Mr. Jones) pressed the Paymaster General on the issue. He said:

“I am listening carefully to the Paymaster General, but let me tell her about my experience in a number of cases. People have actually queried whether they were entitled to a payment, but the Department has insisted that they take the money and subsequently served them with a notice of overpayment. The other thing that my right hon. Friend and the Department need to recognise is that it is all very well saying that people can examine the payment form, but some claimants have very poor literacy and numeracy skills and cannot deal with the complex information that is sent out.”—[Official Report, Sixth Delegated Legislation Committee, 8 March 2007; c. 16.]

During the Treasury Committee hearing yesterday afternoon, which I also attended as a member of the audience, the hon. Member for Newcastle upon Tyne, Central (Jim Cousins) stated directly to the Paymaster General:

“Look, this is extremely serious. You have just given this Committee a figure that shows that 97 per cent. of people earning less than £10,000 a year are receiving working or child tax credits and on the basis of the last figures this Committee has one in five of them will be affected by underpayments and two in five of them might be affected by overpayments, and this is happening to people and to families many of whom have gone back to work and are earning £10,000 a year. This is just not acceptable.”

Moreover, the method of adjudicating overpayments has now led to complaints even from Labour Members, just under 100 of whom have signed early-day motion 545 entitled “The Recoverability of Overpaid Tax Credits”. Indeed, the hon. Member for Leeds, East has put his name to that motion. It calls for reform of the way in which the pursuit of overpayments is administered in practice, so even among the Paymaster General’s own ranks, there is a growing chorus of complaint about how the tax credits system works in practice. It is not only Conservative and Liberal Democrat MPs who are complaining about that; large numbers of Labour Back Benchers are doing so as well. As Labour’s poll rating drops and, understandably, its MPs become even more sensitive to constituency complaints, the volume of complaint from the Labour Benches against the tax credits system has increased accordingly.

A former Home Secretary, the right hon. Member for Sheffield, Brightside (Mr. Blunkett), as reported in The Guardian on 12 October 2006, made this note in his diary:

“The tax credit system is a shambles—such a shambles that I’ve had to help out one of my constituents financially, only the second time that I ever have done this, and the first was for a child. I don’t know if I will get the money back. I suppose it is a foolish thing to do, and it has to be on the pain of death that they don’t tell people. But what else can you do when the tax credit system is such a total mess?”

Yes, it was on pain of death that it should not be mentioned, but the right hon. Gentleman gave that quote to The Guardian. I am not responsible for that. Nevertheless, it is a pretty powerful quote from a former senior member of a Labour Cabinet.

Even the former Minister for Welfare Reform, the right hon. Member for Birkenhead (Mr. Field), said on his own website that trying to alleviate poverty with the current tax credits system was like

“attempting...keyhole surgery with a hacksaw”.

He went further in The Spectator on 24 February, when he said:

“Gordon has been wrong on pensions, we’ve run our course on tax credits, there’s no more money and we’ve enveloped huge sections of the population in means-tested benefits; there ain’t any future in this. There is a need for a mega-rethink”.

He then added for good measure,

“that’s why we need a leadership contest”.

He might be right about that.

In summary, the tax credit system is over-complicated and in a mess. Almost half the payments in the system turn out to be wrong, and overpayments are running at 2 million a year. Even the Chief Secretary to the Treasury admitted, in a written ministerial statement of 5 June 2006, that the new package of measures, including the tenfold increase in the disregard, would reduce the likely number of overpayments by only a third. So even with all that extra taxpayers’ money, the Government estimate that they will reduce the 2 million overpayments by only one third. They have chucked even more taxpayers’ money at the problem, but they still cannot make the system work properly. As a result, more than a third of a million people a year appeal against attempts to recover overpayments.

Even Labour MPs who supported the Chancellor’s highly complicated system are losing faith in it and putting the Paymaster General under increasing pressure. I have some sympathy for the right hon. Lady, however, because she continues to have to front for the system to the House. Each month, there is almost inevitably a question about tax credits in Treasury questions, and it is noticeable that the Paymaster General rises to answer while the Chancellor sits silently. As one of my colleagues once pointed out, he might be a right hon. Gentleman, but he is hardly right hon. and gallant when it comes to tax credits.

There are two possibilities. Either the Paymaster General is in denial about the problems with the system and continues to insist that all is well as the water rises around her, or she is now in what has been called the ministerial cocoon. Is it that she is surrounded by senior civil servants who tell her repeatedly that the problems are minor and that all is well, despite the fact that a third of a million people appeal against the system every year? I shall leave it to her to judge which of those is true. Either way, the system is absolutely crying out for simplification and reform. That is why the Conservatives have launched a reform of the tax credits system as part of our wider policy review. We want to create a simpler, more efficient system that helps those who need it, without driving them to distraction. That work is ongoing, and I look forward to debating it with the Paymaster General.

This all feels a little like groundhog day, as I have covered with the Treasury Select Committee many of the subjects that have come up this afternoon.

I start by paying tribute to the valuable work of the Select Committee and its Sub-Committee, under the chairmanship of the hon. Member for Sevenoaks (Mr. Fallon), in examining the administration of the tax credit system. The Committee has shown a continuing interest in the effective implementation of tax credits. Its June 2006 report, which contains some 52 recommendations, was well received on both sides of the House and was the focus of an Opposition day debate in the same month. The report also informed the debate that followed an oral statement that I made in the House in July 2006.

Today, some hon. Members have swung from saying that they do not have enough information to then quoting all the information that they have. There is an extensive amount of information on the tax credit system available. I shall address the points that hon. Members have made today, as well as the Committee’s 52 recommendations and the ombudsman’s recommendations. The purpose of Committees making recommendations and the Government responding to them is to take matters forward.

Although I knew it to be the case, I am grateful to the hon. Member for Sevenoaks for reminding hon. Members that the principle of tax credits is not in question. Neither are their flexibility, responsiveness or ability to support people on the lowest incomes, who are given the highest payments. They support child care, and both support and encourage people in returning to work. All the statistics bear those facts out. Some hon. Members, particularly the Liberal Democrat spokesman, said that they support the system but want to destroy it and put something else in its place. I look forward to engaging with the hon. Member for Rayleigh (Mr. Francois) on the Conservative party’s thoughts, values, propositions—I do not know what they will be—perhaps even policies, on how to deal with tax credits.

The tax credit system is huge and deals with about 20 million people throughout the UK, including 6 million families and 10 million children. Take-up of that benefit is substantially higher, not a little bit higher, than that of any previous income-related financial support for families in work. Low-income families are the most likely to take up their entitlement. The Department’s figures, which were published on 1 March, show that take-up among people with incomes of less than £10,000 is up from 93 per cent. to 97 per cent. and rising. Information from the Organisation for Economic Co-operation and Development and from other sources, not just the Department, show that tax credits have been central to reducing the tax burden on low to middle-income families, and have ensured that 3 million families with children pay no net tax.

I am grateful to the Minister for giving way; I am not trying to spoil her flow. She has used the 97 per cent. take-up figure several times. Does that include child tax credit and working tax credit or just one of them? If the latter, which?

I take it that the hon. Gentleman read yesterday’s transcript. Perhaps he simply read it selectively. That same question was asked of me then and I made it clear to the Committee that I was talking about the child tax credit. I also said that I would send to the Committee the full breakdown, which does exist, of tax credits, including for child care tax credit and working tax credit. A comparison of the take-up of child tax credit with that of income support or family credit, which, even at its height, reached only just over 50 per cent. of those who needed it most, shows that there has been substantial progress.

Performance within the tax credit system has improved. As the Department has taken recommendations on board and changed the system, administrative error has declined substantially. Published figures, which the hon. Member for Rayleigh can look at, demonstrate that improvements in accuracy in calculating and processing awards rose from 78 per cent. in 2003-04 to 97.7 per cent. in 2005-06.

Many of the measures in the 2005 pre-Budget report will ensure further improvements. Many improvements are mentioned in the 52 recommendations of the Committee. Reference has been made to the disregard, but there was also a successful shortening of the renewal period to five months. It will be shortened again to four months this year. That is important in the context of overpayments, because it means that there is a continual shortening in respect of potentially out-of-date information on which the awards are delivered.

Changes are being made on the reporting of circumstances. I want to pick up some of the points that have been made. We are trying, in particular, to ensure a reduction in the areas where there may be a risk. I should refer to the question of relationship break-up, because it has been mentioned. There have also been changes in award notices, in the information delivered routinely to claimants and in the tax credit office, which deals with disputes over claims within a specific period.

Let us consider contact centres, which are the claimants’ preferred method of contacting the Department. Some 98 per cent. of calls are dealt with in the day of the call, and the performance level of the contact centres is high. Last year, we increased the capacity by 1,300 to ensure that the Department was responding specifically to the points that hon. Members have made.

I shall address some of the points that have been made, starting with the point about fluctuating incomes made by the hon. Member for Sevenoaks. He is right that there are two issues concerning how fluctuating incomes can affect the tax credits system. When the system was designed there was incredibly limited information on how family incomes changed within a tax year, given the elapsing of time and the changes in the labour market. The subsequent research by John Hills which was published in March 2006 confirmed for the first time—it also made the information available for the first time on a systematic basis—that a significant number of families had unstable incomes from week to week, or even from month to month, as my hon. Friend the Member for Leeds, East (Mr. Mudie) said.

Taking on the consequences of that situation is important. This partly involves re-examining the disregard and the causes of those fluctuations for that particular group in the tax credit system, and considering what can additionally be done to ensure that those people are supported and to ensure that their likelihood of exposure to overpayments is reduced.

The write-off of overpayments was also mentioned, and the hon. Member for Rayleigh came out with a conspiracy theory. HMRC might be able to do things that he sometimes finds incredible, but his conspiracy theory was not grounded in any of the facts. The policy has always been to write off an overpayment where there has been an official error.

I want to come back to the points made by my hon. Friend the Member for Leeds, East about the difference between the Department for Work and Pensions and HMRC. I have always said that on official error and on where the claimant could have reasonably believed that an award was correct, rights and responsibilities are in operation. People should inform the Department of the facts of the claim, check that they are right and then receive the payment.

It is true that the number of overpayments that have been written off due to official error reduced between 2005-06 and 2006-07. I can tell the hon. Member for Rayleigh that the latest figure, which covers up until the end of February, is 9,300. The figure of 8,600 that he gave covered until the end of January. The situation reflects the fact that there are time lags in the system and that the high number of cases written off in 2005-06 was because of early problems in the tax credits system—they have never been disputed. That explains the fluctuations.

My hon. Friend the Member for Leeds, East referred to contact centres and to the importance of our inquiry centres.

Is the Paymaster General honestly telling hon. Members that the number of overpayments being written off has fallen—we should bear it in mind that people need to meet two criteria to have an overpayment written off, whereas the Paymaster General has really mentioned only one—from virtually one in two to fewer than one in 20 purely because of a reduced error rate? Is she telling us that there is no financial pressure to claw the money back? If she is, I do not believe her.

I am afraid that the hon. Gentleman will have to rest at not believing me. He refuses to interpret correctly some of the facts that are staring him in the face, and there is not a lot that I can do about that. I am telling hon. Members precisely what he says.

I shall give way to the two hon. Members who have stood up, but in fairness to the points that others have made, I shall then need to make progress in answering them.

This goes to the heart of the whole issue. The Paymaster General is saying that the performance of HMRC, as it is now known, has improved and therefore the overpayment reclaim rate is higher than it was before. That is patently not true. The cases that I have before me and those which I have referred to the adjudicator, to the ombudsman and to her, in some cases, almost invariably involve an acknowledgement of official error. The acknowledgment is to the point where compensatory payments are even made for those mistakes, but responses then go on to say, “You should have known that you were wrong.” That places an unfair and unjust burden on the claimant.

I want to come on to why the reasonableness test acts as it does and the statutory requirements that it involves. There is nothing new in the reasonableness test. One of the points that was fairly made yesterday—I cannot remember which member of the Sub-Committee made it, but I gave an acknowledgment and said that we were taking work forward—related to the constituency of application of the reasonableness test and how we can be assured that the test is operating as it should. I put aside the question of appeal, because I want to deal with that later, but I have explained to hon. Members precisely why the figures have changed.

Let us assume, as the Paymaster General says, that the reason why the write-off rate has fallen so dramatically from 44 per cent. to 3 per cent.—it is possibly at 4 per cent. now—is the fall in the official error rate. Given that the official error rate is 5 per cent. and the write-off rate is 3 or 4 per cent., what was the level of official error rate when the write-off rate was 44 per cent?

The hon. Gentleman questioned us on this yesterday, so he knows about our ability to separate official error from claimant error and fraud. The way that the figures are produced means that those things are amalgamated in them. One of the discussions that we had—the issue has been raised again today—was about whether the Department can specifically separate the official error rate within its statistics.

I have answered the point, and it is late in the afternoon. The hon. Gentleman had an opportunity to question me closely yesterday, so, in order to be fair, I should respond to the points that have been made today.

My hon. Friend the Member for Leeds, East asked about access for particular groups, and said that telephone contact alone is not sufficient. Extensive work is taking place, and HMRC is running pilots in Jobcentre Plus. There are also pilots with Citizens Advice and the Department to look specifically at understanding that group of claimants, as my hon. Friend advocates, and we must make greater efforts to do so. There is a programme in Plymouth, in partnership with the local authority, Citizens Advice and Money Advice Plymouth. In different ways, we are trying to understand how to go beyond what we already make available to claimants to improve their situation.

I applaud the Paymaster General’s efforts, but I was simply saying that in Leeds we have tax offices where people can make an appointment to sort out tax difficulties and misunderstandings. Is it not possible to have a presence on the tax credit side in those same offices, so that there is a ready point of public access that people can take advantage of?

Yes, of course there is. An inquiry centre should do that, and if my hon. Friend is saying that that is not operating through the inquiry centre in his constituency and that such advice is not on offer face to face, I will pursue the matter. That is the point of inquiry centres, but I want to expand access beyond that.

My hon. Friend also asked about appeal on entitlement, and referred to what the Child Poverty Action Group said to him and to the Sub-Committee: that the Department acted as a gate-keeper to whether appeals on entitlement were passed to the tribunal. He was right in saying that there is an appeal procedure. I confirm that that is slightly different from acting as gate-keeper. It did not do that, but what was happening—he speculated on this—was that someone was given a notification of appeal and the Department then offered the final review on whether a settlement could be made before appeal.

Quite rightly, in my view, the CPAG said that that was not clear enough, because it could be misinterpreted, and that there should be a clear indication of appeal rights on entitlement and so on to the tribunal. If a review is offered before that, it should be made clear that the appeal can still take place subsequently. The text of the letter that will explain that to claimants will be shared with the CPAG to ensure that it is clear to everyone.

On the question of appeals and the difference between the structure in the Department for Work and Pensions and that in HMRC, I said yesterday that I would send the Sub-Committee my view on that, because there seem to be different interpretations. DWP’s policy is to ask for repayment when an overpayment is caused by official error but it is reasonable to expect that the claimant would have been aware of being overpaid. DWP has no statutory test or right to appeal to recovering overpayments caused solely by official error. That rests on common law application.

On tax credits, the reasonableness test is a principle that has operated in the tax system since 1971—the hon. Member for North Thanet (Mr. Gale) also raised this—and the tax credits legislation provides the Department with a statutory discretion to recover overpayments, hence the way the system operates. The codes of practice—COP26 in this case—are recognised as statements of departmental interpretation of the law across Departments. They are binding on Departments and can be used in evidence in court or before a tribunal. The legislation gives the Department discretion, and the discretion is then expressed in a code of practice. That is partly what my hon. Friend the Member for Leeds, East implored me to return to the primary legislation, if necessary, and that is where the operation of the reasonableness test is provided for.

My hon. Friend also touched on the pause. There is effectively an IT pause in the system, but I was unable yesterday to give a specific time for that release, and he suggested that I just instruct the Department. This is what the Department is saying to me, and this is what I am pushing back on the Department. It touches on the point made by my hon. Friend the Member for South Derbyshire (Mr. Todd) about what can be delivered in the system without causing untold consequences because of the way the system is constructed.

There is also a need to set priorities, given the wealth of recommendations—52 in the Sub-Committee’s report, and those from the ombudsman. The current advice to me is that the change would involve the risk that it might displace other enhancements to the system. Until I am satisfied that I have got to the bottom of that, I cannot take the matter further with commitments to the Sub-Committee. However, I want to make it clear, as I did yesterday, that that is exactly what I am attempting to do.

The hon. Member for North Thanet referred to a number of other matters, including the adjudicator and the ombudsman. The ombudsman’s press release on 13 July 2006 stated:

“Ms Abraham commented on the positive way in which HM Revenue and Customs…had worked constructively with her office on the issue of tax credits. HMRC responded to her report to Parliament in June 2005 with some substantial changes to the administration of the system and agreed new ways of handling complaints.”

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. Members of the Sub-Committee may remember that I explained to both the ombudsman and Parliament that I was unable to concede to one recommendation: the write-off of all payments up to a particular point. Otherwise, progress is being made, as the ombudsman recognises and as the hon. Member for Sevenoaks acknowledged in his opening comments.

I disagree with the hon. Member for North Thanet who said that the adjudicator has been compromised. Working with the adjudicator, for example, we are considering possible improvements to the system beyond those that are already before the House. I met the adjudicator a few weeks ago, and we discussed some cases. She felt that there were difficulties with the reasonable belief test, and she said that she would return with examples of cases that could be clarified, or that could assist with the way in which we determine disputed overpayments. [Interruption.] I really must leave a few minutes at the end, so I shall speed up my comments.

My hon. Friend the Member for South Derbyshire also made points about the reasonableness test, and he referred to the persisting difficulties that error in historical data causes. I have always acknowledged that problem, and on several occasions I have also told him that it is important to ensure that we get the best, incremental improvement in the system. Tax credits are an annual system, and he is quite right that inevitably, therefore, there is a time lag in producing the comprehensive statistics. I have pressed the Department on how we can provide quicker information, and particularly information about official error in disputed overpayments.

We referred yesterday to the fact that the Department has examined a sample—the 5 per cent. official error figure comes from it, but it is small and therefore unreliable—and that from April it will complete the sample systematically for a full year. In that way, the Department will begin to understand the way in which the figures for official error and the separation of the components can be produced reliably.

A great deal of the speech of the hon. Member for South-West Hertfordshire (Mr. Gauke) covered information that he will send to me, so we will deal with it when he does. He referred to the lone parent figure, and it was said at the time that the difference in numbers reflected a difference in definitions, not fraud. The IFS research used definitions from the family resource survey. Tax credit claimants are asked whether they live together as husband and wife, and whether they pool their finances. There are ways of checking the situation—a potential vulnerability—and that is clearly carried out. There are sometimes differences in the definitions of lone parent, and that example applies.

The hon. Gentleman referred to a tougher line and to writing off overpayments, and I have dealt with that. [Laughter.] Well, I could say, “I have responded to those points,” if he would prefer it in a slightly softer fashion. I am watching the clock carefully and trying to hurry to give the hon. Member for Sevenoaks time to make his concluding remarks.

Finally, there were some questions about process, including whether the helpline operators are properly trained and whether they provide enough information. If I were to go through the Select Committee’s 52 recommendations, we would be here considerably longer, but most of the recommendations either have been, or are in the process of being, dealt with. It was recommended that we update the process, and we are reviewing the scripts that our contact centre advisors use and the advice that they provide. The hon. Member for Inverness, Nairn, Badenoch and Strathspey (Danny Alexander) expressed views about children who reach 16 years old but remain in full-time education, and we are giving particular consideration to how we can deal properly with that move from one area to another.

In response to another recommendation, from next Monday at two separate centres we will run time-limited pilots on relationship breakdown, because hon. Members rightly referred to the fact that if one’s relationship breaks down, the last thing one thinks is, “Goodness me, I must ring HMRC to let them know my tax position.” The tax credit system copes with that situation by allowing payments to run on and then by backdating the claim, but we are exploring ways in which we can deal with the issue. We are also using proactive questioning about changes in circumstances, so that our material is much more timely, specific and able to deal with the very points that hon. Members have raised today.

The tax credit system has helped families enormously, and with child care in particular. There are issues that must be addressed, and I am grateful for the continuing assistance not only of the Treasury Committee, but of other Committees and of hon. Members. I assure them that progress is being made.

With that leave, I shall reply briefly to the debate that you have so ably chaired, Mr. Marshall.

I am grateful to all who have participated, including the four Treasury Committee colleagues who have attended today’s debate. They all made important points. The hon. Member for Leeds, East (Mr. Mudie) pressed his point on appeals, to which I am sure we will return. My hon. Friend the Member for North Thanet (Mr. Gale) spoke of his own preference for fixed awards, and it is interesting that it has never been definitively ruled out. The hon. Member for South Derbyshire (Mr. Todd) drew attention to some of the management weaknesses in the tax credit system, and my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) pressed the Government on the scale of the error, to which we will no doubt return.

The hon. Member for Inverness, Nairn, Badenoch and Strathspey (Danny Alexander) referred not only to our criticisms, but to those of the ombudsman, and he added a menu of his own suggestions for reforming the system, which we will want to study in more detail. My hon. Friend the Member for Rayleigh (Mr. Francois) developed a harsher critique, and if I have him right, he made the important allegation that HMRC is now under pressure to recoup the increased cost of the disregard through the harsh decisions that it now takes. The Paymaster General then did her best to defend the case that she has to defend.

This has been an important debate on tax credits, and it will clearly not be the last. Given the scale of the tax credit system, its importance in helping people back into work, which we have accepted, and its huge cost to the Exchequer, the onus is still firmly on the Government, HMRC and the Minister responsible to make it work more efficiently and effectively. Some progress has clearly been made, but there is a long way to go. Further reforms of the system will be needed, and I assure the Paymaster General that the Treasury Committee will continue to keep an eye on it.

Question put and agreed to.

Adjourned accordingly at twenty-eight minutes past Five o’clock.