Ombudsman reports on problems with tax credits and putting things right

22 June 2005

Press release 06/05

The Parliamentary Ombudsman, Ann Abraham, today reports continuing problems with the operation of tax credits. Ms Abraham also makes a series of major recommendations aimed at improving the way the system works and helping those who have been disadvantaged by it.

Drawing on complaints to her office (currently 23% of all cases received this business year), a special report, Tax Credits: Putting things right charts the experiences of the key groups who were intended to benefit from the reforms, introduced in 2003 by the Inland Revenue (now HM Revenue and Customs): poor families with children and those on low incomes. While noting that millions of people have benefited from tax credits, it outlines what has gone wrong, the impact on customers, particularly those in low income groups, the Inland Revenue’s response and the lessons to be learned.

The report concludes that ‘teething problems’ identified early in the life of tax credits have not been completely overcome. It continues that ‘it is clear that the Revenue’s assurances were over-optimistic.’ The majority of problems with tax credits seem to originate from the design of the system itself, which is wholly IT based, and does not take account of the needs of customers. A financial system which has an element of financial uncertainty built in also makes it difficult, or even impossible, for recipients of tax credits to budget ahead. The families affected can pay a heavy price when payments are drastically reduced or stopped altogether to recover overpayments and many have then had to borrow money or run up credit card debts in order to pay their day to day living expenses.

The report provides a number of case studies, taken from complaints the Ombudsman has received, illustrating the hardships caused when people on low incomes have over-payments recovered without proper warning, and of the difficulties of budgeting when incomes are uncertain. It says that ‘it is also becoming clear that the cases considered by the Ombudsman’s Office represent the tip of a much bigger iceberg’, quoting figures recently released by the Revenue which showed that at the end of the first year of the system, a third of all tax credit awards (1.879 million) had been overpaid.

According to the Ombudsman, the system ‘appears unable to provide an immediate, responsive and appropriate service, particularly when things go wrong’. Problems include:

  • poor information on award notices
  • poor accessibility, with customers reporting serious difficulty in contacting the Revenue to get queries answered or problems sorted out; telephone lines that are engaged and letters not responded to;
  • delays in dealing with appeals and complaints.

The report says that changes are needed urgently, particularly in the light of the extra 800,000 people on low incomes due to come into the system soon. The Ombudsman makes 12 specific recommendations to improve the system. They cover the way in which the Revenue deals with overpayments, communication with customers, and the steps to be taken by Revenue staff to reduce the risk of their customers experiencing financial hardship.

It also recommends that consideration should be given to writing off all excess and overpayments caused by official error which occurred during 2003-04 and 2004-05. The final recommendation is that the Revenue should reconsider the way it delivers tax credits in order to deliver a better service to its customers. The Revenue should ‘devise a different model in complex cases and where something has gone wrong.’ It calls for ‘more sustained and informed communication with customers’ about their cases.

Ann Abraham commented today, ‘I believe that the case of tax credits holds important lessons for all public bodies when designing and implementing new policies and systems. It is crucial to see things from the customer’s perspective. While it has benefited many millions of people, the tax credits system is currently operated in a way that can have unintended harsh and unfair consequences for vulnerable groups of people who will often have particular needs.

‘We now need to look forward. That is why I have made a number of recommendations to improve the operation of the system by making communication and accessibility better. I also recommend that consideration be given to writing off all excess and overpayments caused by official error in the first two years of the system. This would be a sensible and proportionate response to the situation and would give much-needed relief to people who, in many cases, have been caused considerable distress and hardship.’

For more information please contact the press office on 0300 061 4996 or email press@ombudsman.org.uk.  

Notes to Editors

  1. Publication details: The Parliamentary Ombudsman Tax Credits: putting things right, HC 124, 21 June 2005, The Stationery Office (Order line: 0845 7 023474)
  2. Press copies : the reports are available from the Press Office, Parliamentary and Health Service Ombudsman, Millbank Tower, Millbank, London SW1P 4QP, telephone: 0300 061 4996/3943, e-mail press@ombudsman.gsi.gov.uk.
  3. From 22 June you can also find the reports on the website at: http://www.ombudsman.org.uk