Summary and recommendations
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Design of the tax credits system
General failures in complaint handling
The unfair application of COP 26Other concerns
My special report on the administration of the Child and Working Tax Credits system published in June 2005 (Tax Credits: Putting things right) highlighted the key issues and challenges that the new system had created for HMRC in the first two years following its introduction. It noted in particular that, although for the vast majority of tax credit recipients the system appeared to be working reasonably well, it nevertheless led to some harsh consequences for a significant number of HMRC’s most vulnerable customers. In particular, the treatment and recovery of overpayments of tax credits was causing considerable financial hardship and distress. In response to the problems identified, I made twelve recommendations which were intended to help relieve some of those consequences and promote a more customer-focused approach.
Since then, HMRC have made a number of improvements to the administration of the tax credits system, both in response to those recommendations, and also more widely. These have included improvements in the information provided to customers in terms both of its clarity and helpfulness, such as in the award notices. Significant efforts have also been made, through media campaigns and other channels to raise customer awareness of the need to report changes in circumstances promptly and thereby avoid overpayments, and also of the need to check the personal information provided in the award notices and report errors and omissions to HMRC. There have been considerable improvements in the accessibility and reliability of the advice and information available to customers in respect of their tax credit claim, both via the Helpline, and from individual staff. Those with a claim affected by technical problems have, in particular, been provided with better support and information. There has also been a reduction in human errors in the processing of claims, leading to fewer cases where multiple award notices have been issued. Many of the technical problems that were affecting significant numbers of cases have been resolved (although some remain, causing huge frustration for those affected). In addition, the tax credits complaints handling system has been improved, in particular the backlogs in both disputed overpayments and complaints have been significantly reduced. These improvements have been reflected in the nature of the complaints being referred to my Office.
As a result of the improvements, I came to the view that HMRC had reached the position where it should be able to resolve promptly and satisfactorily, through its own complaints processes, many of the complaints about tax credits that were being referred to me. Accordingly, from 1 April 2006 onwards, it was agreed that complaints to my Office which had not completed HMRC’s complaints process would normally be referred back to them to resolve. It was anticipated that the number of tax credits cases being referred to me would subsequently decline.
However, two years after the initial report, and 18 months after the introduction of the new arrangements for complaints referred to above, the number of complaints being referred to my Office remains high. A review of these shows that the vast majority relate to overpayments and their recovery, and in particular to the application of the Code of Practice 26 (COP 26): What happens if we have paid you too much in tax credit?, the guidance which HMRC follow when determining whether there are grounds for waiving the recovery of an overpayment.
It had been anticipated, despite the fact that overpayments are an in-built part of the annualised system, that the number of overpayments would decrease significantly once the new tax credits system had bedded down. The recently published figures on overpayments relating to the 2005-06 year, however, showed that, although overpayments had fallen2, the scale of the problem had not altered as much as anticipated from the first years of the new tax credits system. Almost a third of all tax credit awards had once again been overpaid, and almost half a million awards (494,000) had been overpaid by over £1,000; some 25,000 of those by over £5,000 in that one year alone. Of most concern is that a significant proportion of those overpayments (363,000) were again made to those on low or very modest incomes, where household income was less than £10,000. HMRC expect the volume of overpayments to reduce by about a third from 2006-07 onwards, following a package of reforms announced in the 2005 pre-budget report, including the increase in the earnings disregard from £2,500 to £25,000. However, because of the time lag before robust data on that becomes available, and also the time it takes before complaints work their way through the internal complaints process and are referred to my Office, it is not yet possible to assess precisely what impact those policy changes will have on the volume of overpayments arising.
Analysis of the complaints currently being referred to me suggests that they fall into three key groups:
- The design of the tax credits system
- A failure in complaints handling
- The unfair and unreasonable application of COP 26.
Design of the tax credits system
I continue to receive a significant number of complaints where the overpayment complained about has arisen solely as a result of the annualised system operating as intended. Despite HMRC’s efforts so far, it is clear that many people simply do not understand that it is possible for them to have provided all the correct information, and for their award to have been properly assessed on that basis, but that because of changes in their circumstances towards the end of the tax year, they could find themselves with a significant debt to repay when their award for the previous year is finalised.
What appears to have confused tax credits customers most is that it was generally a positive change in their circumstances, such as finding employment, which threw them into debt. Further, the delay in matters being finalised meant that it might have been a long time afterwards before they learned that they owed these monies. Complainants frequently explain how they budget carefully to avoid debt, and have little or no savings to fall back on, and how distressing it therefore was for them when this happened. They assume there must be some mistake. Others question the logic of a system intended to support those on low incomes into work, when the way the system worked meant that they could be better off delaying taking up employment until the beginning of the next tax year. The policy changes which have been made to the tax credits system from the 2006-07 tax year onwards (in particular the increase in the income disregard threshold to £25,000) should mean that this will no longer be a practical concern for most families. Nevertheless, it is clear that many complainants remain unable fully to grasp the basic principles of an annualised system.
General failures in complaint handling
Whilst there have been some improvements in the complaint handling system, HMRC are still failing to take opportunities to get their decision on a complaint right first time. For example, a number of the complaints my Office has investigated have revealed that even where the complaint revolved solely around what a customer was told in a particular telephone call, HMRC have not made the effort to locate and listen to the call in question. Similarly, assumptions have been made about what an award notice would have said, without checking the notice itself. Further, there is still some confusion about what constitutes a complaint, a dispute or an appeal.
It is clear that the Tax Credits Office still have some way to go in providing ‘fit for purpose’ complaint handling arrangements.
The unfair application of COP 26
I remain of the view that, applied reasonably and sensitively, COP 26 is capable of providing fair and appropriate outcomes for tax credit customers. I also share HMRC’s view that there is a responsibility on both them and their customers to help ensure that payments of tax credits are correct. HMRC’s expectation that customers check the personal information in their award notice and notify them of any error or omission is not unreasonable. However, there is also an expectation on HMRC that when considering whether to recover an overpayment under COP26,they will consider all the circumstances of the case, including the individual and their personal circumstances, and if the overpayment is considered recoverable, the impact that recovery is likely to have on them in terms of hardship. A review of the cases my Office has seen suggested that in a relatively small, but still significant, number of cases the Tax Credits Office were failing to consider the specific circumstances of each case on its merits. In particular, they:
- took a very rigid approach and assumed high levels of understanding of the system in terms of whether it is ‘reasonable’ for someone to know they were being overpaid;
- did not take account of the very different circumstances prevailing within the Tax Credits Office in 2003-04 and 2004-5; in terms of the difficulties customers faced in accessing the Helpline, the failure to record telephone calls or to respond to correspondence, and the general unfamiliarity amongst claimants and Tax Credits Office staff about the tax credits system, leading to misadvice and confusion;
- did not take account of the claimant’s circumstances at the time they were expected to spot the error in their award notice/payments, including failing to consider circumstances that might reasonably affect the likelihood of the individual's/family’s noticing, or following up on, HMRC errors (such as exceptional health problems or bereavement);
- assumed that the very fact that a claimant had notified HMRC of a change of circumstance or error in their award notice meant that, having done that, they could not possibly meet the ‘reasonable belief’ test, on the grounds that they must have known that their payments were wrong;
- did not take any account of the number of times someone had notified HMRC of things that might well affect their award, such as a mistake on their award notice/a change of circumstances, and that HMRC had failed to act; and
- frequently failed to consider whether recovery would cause hardship as part of the COP 26 consideration of their case.
As a result of these failings, some tax credit customers on very low incomes and living in very difficult circumstances, were finding themselves in the distressing position of being unfairly required to pay back often large overpayments which were caused by official error.
Discussions with HMRC centrally, the Adjudicator’s Office and the Tax Credits Office revealed considerable confusion and an apparent divergence of understanding as to the proper application of COP 26, and a revision of COP 26 is underway. However, to ensure that the revised version is properly and fairly applied HMRC will need to ensure clear and comprehensive guidance on its purpose and application, ensuring appropriate training which addresses not just the process, but the desired outcomes, and proper mechanisms to ensure that learning from upheld complaints is fed back to those applying COP 26.
Other concerns
A further concern identified was where overpayments were declared, in effect on a technicality, despite the fact that, had the customer followed the proper process, they would have been entitled to tax credits. One example was where, either because of misadvice or misunderstanding of the system, claims had been made in the wrong capacity (for example, as a joint claim, rather than as a single claim). In some such cases, the Tax Credits Office had simply declared all the payments made since the start of the claim as an overpayment. They had not taken account of any notional tax credits payment to which the customer would have been entitled had they made an appropriate claim at the outset, even where that claim might have resulted in a higher tax credit entitlement. Similarly, all tax credits paid on a provisional basis in a tax year from 6 April onwards can be declared an overpayment because the customer apparently failed to return an annual statement, even where the customer denied receiving it, or insisted they had returned it and, had it been processed, they would have been entitled to the sums in question. These sorts of scenarios not only appear to defy common sense, but also to be completely out of line with the policy aims and objectives.
Conclusions
HMRC have clearly made significant improvements to the administration of the tax credits system. However, for a small, but significant, number of customers - typically those on the lowest incomes, who are amongst the most vulnerable in society - their experience of claiming tax credits is a highly distressing one. HMRC need to look closely at the specific needs of this group and ensure that their processes are able to consider and respond sensitively and appropriately to their individual circumstances. The customer experience of this group, as reflected in the complaints referred to my Office, again also raises fundamental questions as to whether a system of this nature, which includes a degree of financial uncertainty and the possibility of debts arising, can really meet the needs of this particular group of individuals and families, and the policy objectives.
Recommendations
The distress and hardship unnecessarily caused to some low income families faced with the recovery of tax credits overpayments require prompt action. The revisions that HMRC are proposing to make to COP 26 should go some way towards ensuring that decisions on recovery will be far less harsh and more appropriate to this particular customer group. However, those revisions will not be sufficient in themselves to deal with all of the problems identified in this report, nor prevent potential future misunderstandings arising about the proper application of the revised Code. This report therefore makes six recommendations:
1. HMRC should produce clear and comprehensive guidance for Tax Credit Office staff on the purpose and application of the revised COP 26 with linked case examples. (Paragraph 3.18)
2. All staff required to apply the revised COP 26 should be given training in the appropriate way to approach such cases and the outcomes expected. (Paragraph 3.18)
3. Appropriate analysis and feedback mechanisms should be put in place to ensure that the learning from upheld complaints about the unreasonable application of COP 26 is fed back on a regular basis to all those staff involved in its application. (Paragraph 3.19)
4 . HMRC should review their guidance to their staff on how they should approach ‘good cause’ in relation to a customer’s apparent failure to return an annual statement to ensure that it is not unduly restrictive in its application as to be unfair. (Paragraph 3.23)
5. HMRC should identify how they can work in a more co-ordinated manner to ensure that contacts with their tax credit customers about recovery of overpayments take proper account of any other action HMRC are currently taking in respect of the customer’s tax credit position, and of the overall impact on the customer’s financial circumstances. (Paragraph 3.25)
6. In considering the recovery of tax credit overpayments, the Debt Management and Banking Unit should be required to tailor their approach to the needs of the customer group. In the case of tax credit recipients, that would include considering family circumstances (such as whether they include children or adults with disabilities or severe illness), and the likely impact on the individual or family. That consideration should also include whether recovery, either immediate or suspended, would work against the policy objectives of the tax credits scheme. (Paragraph 3.27)2. Overpayments were £2.2bn in 2003-04, £1.8bn in 2004-05 and £1.7bn in 2005-06
