The tax credit system has delivered three key achievements: it has improved incentives to work, reduced the tax burden on low to middle income families and helped to dramatically reduce child poverty. The National Statistics published on 22 May show that the total number of families benefiting from tax credits rose to 5.94 million in 2005-06. These statistics contain a wide range of other information about tax credits, and show that:

339,000 families benefited from the childcare element of Working Tax Credit (an 11 per cent. increase in the number benefiting in 2004-05).

89,000 families benefited from the disabled worker element (a 13 per cent. increase compared to 2004-05).

As a proportion of gross spending, end year adjustments leading to an overpayment have halved since the introduction of new tax credits to just ten per cent.

In line with expectations, end of year adjustments leading to an overpayment have fallen by a further £100 million since 2004-05, building on the significant progress made between 2003-04 and 2004-05 when overpayments fell by a fifth.

Tax credits today provide support to 20 million people including 6 million families and 10 million children. Take-up of tax credits is a significant success. In 2004-05 take-up of the Child Tax Credit rose from 79 per cent. to 82 per cent., with over 90 per cent of the money available being claimed. Take-up among those on incomes below £10,000 is 97 per cent; and take-up among lone parents is 93 per cent. This is higher than for any previous system of income-related financial support for in-work families.

Tax credits play a major role in moving people into work and helping people move up the employment ladder, ensuring that work pays over welfare. Tax credits and economic stability have helped to increase the number of people in work by over 2.5 million since spring 1997.

As a result of the Government's reforms to the tax and benefit system since 1997, from April 2007, in real terms:

families with children are, on average, £1,550 a year better off, while those in the poorest fifth will be, on average, £3,450 per year better off; and

a single-earner family on half average male earnings with two children is £3,900 a year better off.

The tax credit system has also played a key role in tackling child poverty. Since 1998-99, 600,000 children have been lifted out of relative poverty, compared to a doubling of child poverty in the previous 20 years.

Tax credits are designed to tailor support to families' specific circumstances, and to respond to their changing needs. Household incomes and circumstances that can, of course, change during the course of the year. Payments are therefore subject to adjustment during the course of the year and, if necessary, at the end of the year once these changes are known. The only way to avoid these end-year adjustments would be to have a system where payments were fixed, based on past information. This would mean that families could not benefit from this flexibility to give extra support when they need it most. Statistics published today show that between 2004-05 and 2005-06 720,000 families experienced a fall in their income, and benefited from extra support through tax credits.

Building on the significant progress made in 2004-05 when overpayments fell by a fifth, National Statistics show that end-year adjustments leading to an overpayment fell by a further £100 million in 2005-06. The figures for end-year adjustments do not show the impact of measures announced at the time of the 2005 Pre-Budget Report. Once these come fully into effect the level of end-year adjustments are expected to fall by a further third in future years.

HMRC is making good progress in implementing this package of measures, and this is already making a significant improvement to the way in which the tax credit system operates and to the outcomes for families:

the amount by which ongoing tax credit payments can be reduced in order to recover an in-year overpayment has been restricted. This gives greater certainty of award for claimants, and reduces the effect of reported changes on continuing payments.

the income disregard has been successfully increased to £25,000. This has ensured that almost all families with increasing incomes will not have their tax credit entitlement reduced in the first year of the increase, further boosting work incentives and reducing overpayments. Analysis based on data from the first two years of the system's operation indicates that about 600,000 families per year will benefit from the increase in the disregard, and two-thirds of those beneficiaries will be in the bottom 30 per cent of the income distribution.

the renewal period has been successfully reduced to five months. As a result, 1.4 million more claimants had their 2005-06 awards finalised and were off provisional payments by 31 August 2006 than by this point in the previous year. As a result of this success, in the 2006 Pre-Budget Report the Government announced that in 2007 the renewal period will be further shortened to four months. This will further reduce the time over which claimants are paid on the basis of information rolled forward from the previous tax year, which is often out of date.

new reporting arrangements have been introduced to increase the number of changes in circumstances that are reported to HMRC and reduce the time taken to report these changes. This has shortened the time when people are potentially paid too much (or too little), and was supported by an advertising campaign “when life changes”. HMRC have also sent a mailshot to claimants to remind them of the new reporting requirements and initial feedback suggests that tax credit claimants are aware of the need to report changes of circumstances promptly to HMRC.

HMRC has started to adjust future payments when an estimate of lower current year income is reported but not make a one-off payment for the earlier part of the year. When the award is finalised after the year end, any necessary adjustments to payments will be made. This will tackle the problems associated with families overestimating falls in income.

ahead of the renewals exercise, earlier this year HMRC also wrote to around 2 million low-income claimants to encourage them to provide an up-to-date estimate of income so that their provisional payments for 2007-08 can be more accurately set.

In addition to these measures, Budget 2007 announced a four-week run-on in entitlement to Working Tax Credit from the day a claimant ceases to work over 16 hours. This will reduce the number and value of overpayments occurring when people are late in reporting that they are no longer entitled to Working Tax Credit.

Accuracy in processing and calculating awards rose from 78.6 per cent. in 2003-04 to 97.7 per cent. in 2005-06. This improved performance of the tax credits system has meant that fewer overpayments are being caused by IT or administrative error.

The service received by tax credit customers has also been improved. Award notices and guidance have been improved and the "reasonable belief” test HMRC uses to decide whether to write off an overpayment has been clarified. HMRC has also improved its processes for dealing with disputed overpayments, and claimants can now expect disputed overpayments to be dealt with within four weeks.

Since the introduction of tax credits HMRC has had processes in place to deal with hardship and where appropriate can provide additional payments or collect money owed over a longer time or, in exceptional circumstances, write-off an overpayment.

End-year adjustments would be a feature of any flexible system that could respond across the year to families' circumstances as they change. Eliminating the need for adjustments would require a move to a fixed and less responsive system.