Foreword
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This is the second special report on the administration of Child and Working Tax Credits that I have laid before Parliament under section 10(4) of the Parliamentary Commissioner Act 1967. The first, which was published in June 2005 (Tax credits: putting things right HC 124), highlighted the key issues and challenges that the new system (introduced in April 2003) created for HM Revenue and Customs (HMRC). It focused in particular on the new group of customers that were intended to benefit from the tax credit reforms: namely low income families with children, and low income earners.
My first report, drawing on the experience of the complaints referred to me, charted the experience for that group of tax credit customers and suggested that many of the difficulties families were facing were a result of HMRC having developed a ‘one size fits all’ system which was designed to require minimum human intervention, being mainly IT based. HMRC had believed that in doing so, they were creating a fair, consistent and efficient service for all their tax credit customers. What that approach failed to recognise, however, was the very different circumstances and needs within that group. What was very clear from the complaints referred to me was that the lack of proper regard to those circumstances and needs led to the system often having harsh and unintended consequences for HMRC’s more vulnerable customers.
My report in June 2005 therefore made twelve recommendations intended to address some of those consequences and promote a far more customer-focused approach within the administration of the system. This report looks at how far those recommendations have been implemented by HMRC, at what progress has been made in respect of the problems I highlighted in my first report, at the improvements HMRC have made to the system, and whether the complaints now being referred to me suggest that the changes made have had a positive effect for those vulnerable groups.
However, my first report also raised some more fundamental issues for Government and Parliament to address, not least whether a financial support system which included a degree of inbuilt financial insecurity could properly meet the needs of very low income families and earners. This report includes a number of examples of the impact of that financial insecurity on that client group, and how that is leading a number of those affected not only to suffer confusion and hardship, but also to want to opt out of the tax credits system altogether. The impact of a public body’s actions on the individuals concerned is, of course, central to our assessment of the seriousness of any complaint that we consider. That is why the Principles of Good Administration, which I published in March 2007, emphasise the need for public bodies to remain sensitive to the needs of those individuals for whom the service is intended, and to regularly review policies and procedures to ensure that they are effective. That is why I have also included in this report examples of where the tax credits system, even when operating as intended, appears sometimes to be working against the key policy objectives of helping to tackle child poverty (through income-related support for families with children), and encouraging more people to work by ‘making work pay’. This is where changes in circumstances in-year (typically improvements in income) result in overpayments of tax credits to customers, which have to be paid back. Changes have been made to the tax credits system from the 2006-07 tax year onwards (such as the significant increase in the earnings disregard and the targeting of customer communications) which should make such occurrences far less frequent. However, most of the cases referred to me to date relate to overpayments which arose in the earlier years of the scheme, and to recent decisions to recover (or continue to recover) the sums involved. Those decisions effectively place those low-income families and earners in debt, and in many cases will have a financial impact on them for years to come, often causing them hardship and anxiety. There will continue to be a number of such cases being determined (and no doubt complaints about the decisions reached) for some time to come. As I said in my first report, the design of the system is a matter for Government and Parliament to consider, and not for me. I do, however, consider it important that these adverse and distressing, albeit unintended, consequences for this relatively small but very important group of customers, are fully recognised in order to inform policy development going forward.
In conclusion, my report also shows that, despite having put administrative systems in place aimed at enabling them to look at individual circumstances and hardship issues, when considering, for example, whether to recover tax credit sums that have been overpaid, HMRC sometimes misses opportunities to take mitigating action, leaving vulnerable families to suffer unnecessary distress and hardship.
I know from HMRC’s response to my first report, and the dialogue that they have since continued to have with my Office, that they are committed to understanding and improving the customer experience. They are also mindful of the importance of using the evidence of that customer experience, as set out in complaints, as an important feedback and learning tool. I hope, therefore, that they will welcome this second report as a helpful and valuable part of that evidence, which they will use to inform the development of the tax credits system.
Finally, I should make it clear that this report does not address the issue of the ‘section 18’ procedural error, announced in Parliament in July 2007 1 , affecting some 250,000 tax credit cases. I understand that the review of those cases is expected to take three years to complete and it is not clear what impact, if any, there is likely to be on the position of the tax credit customers involved. What is clear is that it will lead to delays in HMRC making final determinations on some of the overpayments arising in those cases, and on the resolution of complaints relating to those overpayments, including by my Office. That is because HMRC will not be able to provide information on such cases to my Office, the Adjudicator or their own complaints teams, until the review of that case has been completed. A significant proportion (around 25%) of tax credit complaints currently being assessed or investigated by my Office are affected by this administrative error. We will, therefore, be monitoring closely HMRC’s handling of this matter.
Ann Abraham
Parliamentary and Health Service Ombudsman
1 In a Ministerial statement on 25 July 2007 the Financial Secretary to HM Treasury announced that HMRC had identified an administrative error that affected approximately 250,000 tax credit awards. She said that all of these awards would need to be reviewed in order to correct the administrative procedure.
