Skip to main content

Tax Credits

Volume 487: debated on Tuesday 3 February 2009

I am pleased to have secured this debate, and I welcome the opportunity to put concerns to the Minister on behalf of my constituents. However, it is regrettable that so long after the identification of the problems with the tax credit system, mistakes are still occurring and even getting worse.

Difficulties with tax credits cause stress and heartache at the best of times, but in this time of economic hardship, sudden demands for repayment could be enough to push many families over the financial edge. It is therefore more important than ever that the Government act to reduce the misery caused to families across Britain by the maladministration of tax credits.

The fundamental problem with the administration of tax credits is that the system is too complicated. It is not only claimants who find it difficult to understand what their entitlements are; Her Majesty’s Revenue and Customs officials have found the system so difficult to administer that an endless catalogue of mistakes has resulted in the loss of more than £14 billion of public money through overpayments, fraud and error since April 2003. If the system is not simplified, that figure will surely continue to rise. In this short debate, I will highlight three major problems with tax credits: overpayments, underpayments and the worrying non-claiming of tax credits by many who are eligible.

In 2006-07, one in five families claiming tax credits was overpaid, which means that some 1.2 million families were overpaid a total of £1.1 billion by HMRC. In the past four years, nearly 2 million families have been overpaid more than once, and some 60,000 have been overpaid three or more times. Although the Government have acknowledged that there is a problem, the figures indicate that it has not been addressed. On the contrary, it has got worse: 400,000 more families were overpaid last year than the year before. The parliamentary ombudsman has referred to the situation as systematic maladministration.

Let us be clear about the situation that people are in. After filling in all the forms and providing all the information requested, their lives are made a little easier by tax credit payments. Then one day, out of the blue, a letter drops through the door demanding the repayment of a large sum. Understandably, many families are shocked and anxious when they read such a letter.

The average overpayment in 2006-07 was £916, which is a considerable amount, especially when one considers that most claimants are families on low incomes. For many families, the overpayment is several thousand pounds, which is an unthinkable sum for a working family to have to find suddenly. Some of my constituents have been in that situation. One constituent wrote to me and said that they were “traumatised”. That is an intense word to use, but it describes what people feel when a financial bombshell is suddenly dropped on them. Dealing with the tax credit office can involve many phone calls and letters. A common feeling was summed up by one of my constituents who wrote:

“I am completely frustrated and disillusioned.”

Elizabeth O’Brien is a single mother in my constituency. When her son left school in 2005 and she continued to receive tax credits, she immediately contacted the tax credit office, both by phone and in writing, to check whether she was still eligible. Despite her efforts to keep the tax credit office informed of her situation, she was eventually overpaid £1,982.92.

Mrs. O’Brien was distressed when she came to my surgery and explained that she was having difficulty affording the repayments. She has even had to cancel her monthly £8 union subscription. It is somewhat ironic that the policies of a Labour Government are leaving people unable to afford their union dues. Although the tax credit office was responsible for Mrs. O’Brien’s overpayment, it refused to write it off so, at the rate of £25 a month, she will be paying for the tax credit office’s mistake until 2015. That is not an isolated case. The need for continual updates to claimants’ information has caused huge difficulties. Surely it would be simpler to have a system of payments fixed on a six-monthly basis to reduce the risk of miscalculation.

The system is so complex that even the tax credit office cannot seem to work out how much people are due. Another couple in my constituency, Mr. and Mrs. MacMillan, have received a number of contradictory letters. I have copies of two award notices—from 10 November 2006 and 6 December 2006—that list exactly the same income for the couple, but give different award amounts. On 10 November, the award was £3,026.06, but less than a month later, using exactly the same information, the award was calculated as more than £1,000 lower, at £1,897.66. If the tax credit office cannot decide how much people are due, how on earth can ordinary people be expected to work it out? That, however, is exactly what the Government ask people to do.

It is not uncommon for scanning or input errors at the tax credit office to result in overpayments. My constituent, Mrs. Gallacher, was overpaid almost £5,000 after the tax credit office incorrectly recorded her and her husband’s income as £340 rather than the correct amount of about £30,000. Although she had provided accurate information from the start, she did not spot the tax credit office’s mistake, and the overpayments continued for more than two years. Mrs. Gallacher is a carer and her husband is a teacher. They have had to remortgage their house and are struggling on their current income, so the repayments demanded by the tax credit office are making life even more difficult for them. Like many others, they are unable to sell their home because of the present market. I wrote to the tax credit office about their case in December, but have so far received no response, and the money continues to be recovered. That couple now face the possible repossession of their home as a result of those problems. I would be grateful if the Minister would agree to look into that particular case and get an answer for my constituents.

More generally, I ask the Minister to offer all claimants a statutory right of appeal against overpayments and to write off overpayments that result from official errors. If nothing else, that might be an incentive for the tax credit office to get things right. In cases in which the tax credit office, not the claimant, has made an error, surely the office should carry the burden of proof, instead of expecting claimants to identify its mistakes.

Another of my constituents, Claire Robertson, was able to resolve problems with an overpayment, but then found, when she went to the cash point one day, that £6,000 had been put into her account with no explanation or warning. Given her past experience, she was understandably suspicious. She said:

“I was yet again left in a state of shock and disbelief. Not being able to obtain any details relating to the transaction until Monday morning I once again had a worrying weekend. It transpired that the money was an automatic pay in from Tax Credits for an amount oustanding! I feel the manner in which this institute deals with people’s lives and emotions is disgusting. First of all I am facing legal proceedings with an amount of approximately £10,000 now I receive £6,000 with no explanation or warning. I don't think my nerves can take much more.”

These cases demonstrate that whether a mistake has been made by the claimant or the tax credit office, and even when the claimant has diligently contacted the tax credit office to point out its mistakes, the claimant is still made to suffer, often through many years of repayment. At a time when the Government are keen to be seen as cracking down on benefit fraud, this system provides a disincentive to claimants to demonstrate honesty in coming forward when a mistake has been made. More and more families are being taken to court over this issue by HMRC, and the average number of court cases each month in this tax year is nine times higher than that in the previous year. Between April and October 2008, 5,697 families were taken to court to recover money that was lost through overpayments, and all at the expense of the taxpayer. Not only is HMRC so cavalier with taxpayers’ money that it pays out too much to more than a million families, but it then compounds its mistakes by starting thousands of costly court actions.

Overpayments are not the only problem—there are also many underpayments. Since 2003, 3.3 million people have been underpaid tax credits; again, those mistakes have often happened multiple times. Some 555,000 families have been underpaid more than once, and 82,000 have been underpaid three times or more. In 2006-07, 135,000 families were underpaid by more than £1,000, and 326,000 families on an annual income of less than £15,000 were underpaid. Missing out on £1,000 of income would be extremely difficult at the best of times, but in the current economic climate, the impact will be felt even more deeply. Hard-pressed families deserve that money and need it to buy basic groceries and children’s clothes, and to pay essential household bills.

In 2004-05, HMRC estimated that only 61 per cent. of eligible families claimed working tax credit and that 82 per cent. claimed child tax credit. Some of the people who are not claiming simply do not know that they are eligible, while others say that the claim procedure is too complicated. Perhaps most worryingly, others, including some of my constituents, have claimed tax credits in the past but have decided not to do so again because they had such a bad experience the first time. A system that was meant to help people has proved so frustrating and worrying, and caused so much misery, that people are now reluctant to claim. That is a truly damning indictment of the tax credit system.

In 2001, when the Government announced the introduction of the working tax credit and the child tax credit, the then Paymaster General, the right hon. Member for Bristol, South (Dawn Primarolo), announced in a press release:

“The Government is delivering on its promise to introduce a new streamlined system of tax credits”


“will provide a secure stream of income for children, whether parents are in or out of work”.

However, it became clear early on that the system was not as streamlined as promised, and in 2005 the right hon. Lady announced:

“The Government has looked to learn from the early operation of the system and will continue to do so.”

The cases I have described and many others like them clearly demonstrate that, more than three years on, the complexity of the tax credit system is still a fundamental flaw. If the Government’s objective was to provide a secure income stream for families with children, they have, by their own standards, failed. As the cases I have cited show, claimants feel anything but secure. Why has the application system not been simplified to eradicate the problems that the tax credit office is having in processing them correctly? Given the complexity of a system in which nine out of 10 families are eligible for some means-tested tax credits, would not it be more sensible and cost-effective to use the existing universal benefits system? Will the Minister at least consider an official review of the efficiency and cost-effectiveness of the present system?

I conclude with the words of one of the many people who have suffered at the hands of the tax credit system. After one of my constituents had the particularly harrowing experience of receiving a letter from the tax credit office demanding £17,000, she wrote to me stating:

“I wish I had never received family tax credits and not because I do not think it’s a wonderful concept, but because of the way it is implemented. This has to stop.”

I quite agree, and I look forward to the Government’s response.

I congratulate the hon. Member for East Dunbartonshire (Jo Swinson) on securing the debate. She has made several important points and raised some cases from her constituency, and I am concerned to hear what she said about them. If she wants to drop me a line about those, I will certainly investigate for her.

Tax credits provide support to almost 20 million people in this country, in around 6 million families and including 10 million children. In the hon. Lady’s constituency the average award is £3,820 a year, which according to the most recent figures is above the national average—by December 2008, 5,700 families and 8,800 children in East Dunbartonshire were benefiting from them. Tax credits have been central to reducing the tax burden on low to middle-income families, helping to ensure that around four families in every 10 in Britain pay no net tax at all.

Tax credits play an important part in helping the unemployed move into work and those who are in work to move up the employment ladder, ensuring that work pays more than welfare. They have also played a key role in reducing child poverty: as a result of all the changes to the personal tax and benefits system since 1997, families with children in the least well-off fifth of the population are now an average £4,100 better off in real terms, and that will rise to £4,400 in the new financial year.

The hon. Lady raised some points about take-up, but the take-up of tax credit is actually very high when compared with all previous in-work family support programmes, and low-income families are the most likely to take up their entitlement. The latest figures show that in 2005-06 the take-up of child tax credit was 82 per cent., with over 90 per cent. of the money available being claimed. Take-up among those with incomes of less than £10,000 a year is now 96 per cent., which is up from 93 per cent. in the first year of tax credits. That is significantly higher than for any previous system of income-related financial support for in-work families. Take-up was 50 per cent. in the early years of the family income supplement, 57 per cent. for family credit and 65 per cent. for the working families tax credit. Of course, we would like the numbers to be even higher, but it is clear from the figures that there is no widespread phenomenon of people having claimed once and choosing not to do so again. I hope that nobody is in that position; at any rate, it is not a widespread problem.

The Government want to ensure that as many families as possible take up the available help. We have set up a taskforce of experts from local authorities and the third sector, which will report in the spring with advice for local authorities on how to improve further the take-up of tax credit and benefits. We are also taking steps to ensure that childless workers claim and receive the support to which they are entitled through working tax credit. In the 2008 pre-Budget report, the Chancellor drew attention to initiatives to increase take-up of such assistance. In particular, Her Majesty’s Revenue and Customs has been working in partnership with other organisations to promote working tax credit in new ways. HMRC is extending its marketing of the credit to 44 organisations with 660,000 employees.

In the year ahead, HMRC will aim to increase coverage further, working with employer corporate social responsibility programmes and using the national employment partnership to draw employers’ attention to working tax credit and the opportunities for their employees. HMRC will also work alongside Jobcentre Plus to ensure that people who find a job through a jobcentre also get advice on the tax credit support available. A big programme of work is under way to ensure that people take up the help available to them, so that we can increase further the already high rates of take-up of tax credits.

The hon. Lady was right to draw attention to some of the difficulties, especially in the early days of tax credits. However, matters have improved considerably since then and HMRC is generally, but not invariably, providing a good service. I recognise, however—the cases to which she referred underline this—that there is room for further improvement. I am optimistic that the tax credits transformation programme will lead to a substantial improvement. It started in 2006 to improve the services that families receive. Through that programme, HMRC aims to provide the help that tax credit customers need when they need it. It involves a new set of services and communication products tailored to customers’ needs. Four new national services have been introduced and the programme is building on this with further pilot projects with a view to implementing them at national level once they have been proved. For example, the first of them will help customers at a difficult time in their life—during a breakdown of a relationship. That service allows HMRC to take the new claim over the phone in just one call so that the customer can get back into payment with, potentially, no delay.

In last year’s Budget, we announced a number of additions to that programme, including: increased proactive support for vulnerable customers renewing their tax credit claims; the roll-out of new services to make claiming tax credits easier and quicker; greater engagement with customers to ensure that they report changes affecting their awards and that could lead to overpayments if not reported; the introduction of more robust identity authentification of tax credit customers; new communications and guidance to ensure that people have more accessible information, allowing them either to take; the right action or know where to ask for help to take it, and work with the national network of children’s centres set up over the past decade to identify the best way to deliver tax credit advice and services to families with children under five. On that last point, HMRC officers have been going into children’s centres—I have spoken to officials at children’s centres in my constituency—and finding valuable channels through which to provide the information on tax credits that parents need. A great deal of work is being done to improve the service, although I recognise that there is further scope for improvement. HMRC is committed to making whatever potential for improvement exists into a reality.

End-of-year adjustment leading to overpayment had already fallen very significantly in 2006-07. I think the hon. Lady was referring to 2006-07 when she said that the number of overpayments had gone up, but that is not correct. The number of overpayments fell sharply in the period, by roughly a third, to £l billion, as a direct result of the successful implementation of a package of measures to improve tax credits announced by my right hon. Friend the Prime Minister, the then Chancellor, at the pre-Budget report in 2005. That might be the package to which the hon. Lady was referring. The current level is less than half what it was in the first year. Overpayments constitute only 5 per cent. of gross spending on tax credits, which is ahead of the projection that was made in 2005 for the fall in overpayments that would follow from the changes that we announced.

The number of families affected by overpayments is down from 1.9 million to 1.3 million, and the average overpayment is down from £827 to £738. In the hon. Lady’s constituency, the number of families affected is down from 2,200 in 2003-04 to 1,300, bringing the total amount of money down by more than a half, from £2.1million to £800,000. Of course, she is right that a single overpayment can still cause real problems, but I wanted to underline how significantly lower the number of instances is. We want to do better in future.

The policy on recovering overpayments is set out in HMRC code of practice 26, entitled, “What happens if we’ve paid you too much tax credit?” which was significantly amended at the start of last year. Previously, the policy was that an overpayment was written off if there was an official error and if it was reasonable for the customer to believe that their award was correct. However, the “reasonable belief” test caused serious concern, particularly because people’s views on what is reasonable can vary greatly.

We replaced that test in COP 26 with a much clearer test that sets out HMRC’s and customers’ responsibilities for checking factual information. In effect, it represents a contract of responsibility. It builds on the existing practice of giving customers the responsibility for checking the factual information that HMRC plays back to them: for example, how many children they have and their income. HMRC also expects customers to check that the amount going into their bank account matches the amount in the award notice.

This is important, and I am keen that hon. Members draw their constituents’ attention to it: if people check the accuracy of the information that is obtained from them, which is set out in the award notice that is sent to them, and check that the amount that is paid into their bank account matches the amount set out on the award notice, they have done all that is required of them. There is no expectation that they will know the formula, and they will not be expected to check the calculation. If there is an overpayment as a result of an official error, but the customer has met his or her responsibilities as I described, by checking the accuracy of the information on the award notice, the overpayment will be written off.

The hon. Lady drew to hon. Members’ attention, perfectly fairly, a case in her constituency, which I am aware of, where the award notice stated a household income of £340 when it was actually £34,000. If the recipient had informed the tax credit office of that error on the award notice, there would not be a recoverable overpayment. It is important that people check those notices and that if they find a mistake they let the tax credit office know. Once they have done that, their position is protected.

The Minister sets out the responsibilities of the recipients of tax credits, but surely the tax credit office has to take some responsibility when accurate information has been provided by people in good faith, after which they receive award notices. For many people, because of the complexity of the system—these are complex documents with lots of different sections—they think that it has all been done properly, having provided accurate information in the first place. So what responsibility does the tax credit office take?

Actually, in terms of presenting the information on which the claim is based, the notices that are sent out are pretty straightforward and include how many children are in the family and what the family income is. If your income is £34,000 it is easy to spot a problem with a notice saying that it is £340. All people need do is to inform the tax credit office of that error and then there will not be a recoverable overpayment. That is the checking process. Those award notices are sent out so that people have the opportunity just to check that the numbers are correct, and if they do so their position is protected.

Unfortunately, that is not the experience of all my constituents. I have constituents, as I outlined, who have taken the proactive step of trying to inform the tax credit office of changes in their circumstances, by phone and by letter, but because the tax credit office has not acted on those new pieces of information they have still found themselves with huge amounts of overpayments. It beggars belief that those people are being made to pay the cost of the tax credit office’s mistakes.

If the hon. Lady’s constituents have informed the tax credit office of errors on the award notice and if those errors have led to an overpayment, that overpayment is not recoverable. If she would like to draw my attention to any examples of that kind, that would be the outcome.

The new code of practice has gone further. HMRC now has a time limit to process reported changes of circumstances, which is, at most, 30 days. In addition, where HMRC makes an error, any overpayment will be remitted if a customer reports the error within 30 days of receiving the award notice. HMRC will remit all overpayments arising following a report from a customer of an error by HMRC. That change will mean a fairer balance of responsibilities between the customer and HMRC. I agree with the hon. Lady that it is important that there should be fairness in that relationship.

It is intended that overpayments should be recovered in a way that does not cause hardship. HMRC restricts recovery from ongoing awards to 10 per cent. for those on the maximum award, and to 25 per cent. for those on the first income taper. A 12-monthly instalment arrangement is available for those no longer receiving an award, with longer payback periods where appropriate. But if even those slow rates of recovery cause hardship, people can contact HMRC, which will consider operating a slower rate of recovery or even, sometimes, writing off overpayments if the circumstances are exceptional.

The hon. Lady asked about underpayments. I am not sure that that is necessarily a problem. In the case of an underpayment, a lump sum top-up would be paid at the end of the year, when families confirm their income and other circumstances to HMRC, if it turned out that they were due an additional sum. The sooner they renew, the sooner they will get their top-up. I would have thought that, on the whole, that is good news for those families. I do not think that that reflects errors in the system. Underpayments are a helpful part of a responsive system; they mean that there is an arrangement through which, if people’s circumstances change and their income falls, the system is able to respond quickly and provide extra help to them. That is a great strength of our flexible system of tax credits, which would be lost if we were to adopt the less flexible system that the hon. Lady suggested.

I shall mention the benefits of the tax credit system in respect of reducing child poverty, including the fall, by 600,000, in the number of children growing up below the poverty line over the last few years.

Sitting adjourned without Question put (Standing Order No. 10(11)).