Introduction
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1.1 In the introduction to my first special report on the administration of the tax credits system introduced in April 2003, I explained that my decision to publish that report had been influenced both by the increase in the volume of complaints that my Office had received and the issues they had raised. In 2004-05 complaints about tax credits formed over 9% of total complaints referred to me in my capacity as Parliamentary Ombudsman and my Office upheld, in whole or in part, some 78% of the tax credit cases we investigated in 2004-05. This was significantly higher than the general rate of Parliamentary cases upheld. A key concern for me was that a high proportion of those complaints (67%) related to large reductions made to tax credit awards in order to recover either in-year excess payments, or overpayments identified at the year end, which complainants contended had been caused by official error, and that those reductions were causing severe hardship.
1.2 Following the publication of my first special report, when HMRC responded favourably to the majority of the recommendations I had made (see Chapter 2 and Appendix B), my Office continued its constructive dialogue with HMRC about improvements to the tax credits system. In my Annual Report for the 2005-06 business year I reported that the number of tax credit complaints referred to me that year had risen significantly; they had accounted for around 22% of our overall Parliamentary workload, and we had upheld, fully or in part, some 90% of the cases investigated. However, I was also able to point to a number of improvements that HMRC had made to the system.
1.3 In particular, HMRC had completely overhauled the way they handled complaints. They had also put in place a new streamlined procedure designed to reduce the backlog of disputed overpayments cases, which HMRC said was prejudicing their ability to provide a reasonable level of service. Under the streamlined process, HMRC remitted most disputed overpayments arising in 2003-04 which had been caused by official error on the basis of both the size of the overpayment and the number of versions of the award there had been. In other words, because of all the disruption in the first year of the new system, they generally accepted at face value customers’ contentions that they had believed their tax credit payments to be correct. As a result, those customers were able to satisfy the ‘reasonable belief’ test in HMRC’s COP 26 (which sets out how they approach tax credit overpayments - see Chapter 3) and have recovery of those overpayments waived. This meant that there were far fewer severe delays in disputed overpayments to HMRC being investigated and resolved. Many complaints had previously been referred to my Office simply because people were unable to get a decision from HMRC in respect of their disputed overpayment or a response to their complaint. As a result of the improvements, we were satisfied that HMRC could and should be able to handle these matters satisfactorily through their own complaints processes, which should in turn lead to a better and more prompt response for complainants at a local level.
1.4 Consequently, from 1 April 2006 we agreed new arrangements with both the Tax Credits Office and the Adjudicator’s Office3. Since that date we have accepted for investigation only those complaints that have completed all three tiers of HMRC’s complaints procedures4; those that raise new issues which we feel need exploring; or where there are other issues making a referral to the Tax Credits Office or the Adjudicator’s Office inappropriate. All other cases where there appears to be some evidence of fault on HMRC’s part leading to an unremedied injustice to the complainant are referred back to those offices for investigation and resolution. The impact of that policy decision is shown in the figures in Appendix A (Complaints received by the Ombudsman against the Tax Credits Office 1 April 2005 - 31 March 2007).
1.5 Appendix A also shows that we: accepted fewer cases for investigation in the 2006-07 business year than in the previous year (120 compared with 404); reported the outcome of our investigations of 393 cases; and that we referred 330 complaints to the Tax Credits Office and the Adjudicator’s Office. Although the proportion of tax credits cases fully or partly upheld has reduced from the 2005-06 business year (74% compared with 90%), it is still very high compared with the overall figure for Parliamentary complaints (63%).
1.6 It is evident from the complaints referred to my Office, that the reduction in the proportion of cases accepted for investigation (or referred back for local resolution) is in part because we have received a significant number of complaints which were about overpayments that had arisen properly as a result of the annualised system operating as intended. An important principle of public service delivery is that public bodies are open and clear about their policies and procedures, and that the information they provide means that people can understand what they can expect to happen. It is clear to me from the comments of many of those complainants and referring Members, however, that a significant number of people still do not fully understand the workings of the annualised system. Many profess genuine bewilderment that, despite having promptly and accurately notified HMRC of changes as they happened throughout the year, they nevertheless found themselves with a (sometimes very significant) debt to repay at the end of the year.
1.7 In other cases, tax credit recipients had themselves delayed notifying HMRC of changes to their circumstances, or failed to query incorrect award notices, without realising the significant impact that that might have. I would agree with HMRC that where tax credit recipients have themselves either caused an overpayment to arise, or not taken action where appropriate to prevent it arising, they should generally be required to repay the sums in question. It seems to me that there is a clear joint responsibility on both HMRC and the tax credit customer to ensure as far as possible that the payments customers receive are correct. That does not mean that tax credit customers are expected to be able to calculate their awards, or even be able to assess broadly the sums to which they might be entitled. That would be an unreasonable expectation. However, HMRC make it very clear on the award notice itself that they expect customers to check the personal information included in the notice on which their award is based, and to alert HMRC to errors in that information. They also expect customers to check that the payments they receive are in line with what they have been told they will receive in their award notice. It is an important principle of good administration that customers are not only able to understand what they can expect from a public body, but that they are told very clearly what the public body in question expects of them. I am satisfied that HMRC are acting in line with that principle here in making their expectations clear to their tax credit customers. I would also add that, in general, those expectations seem to me to be both reasonable and appropriate, and take proper account of the fact that the sums in question are paid out of the public purse. Nevertheless, I have seen many cases where, because it is difficult for tax credit customers to assess for themselves the impact on their award of the changes in their circumstances, complainants have understandably been deeply shocked by the size of the overpayment that has thereby arisen. That is sometimes coupled with the fact that the first time they became aware of the scale of the debt (possibly because they have changed address and overlooked the need to notify the Tax Credits Office of that change, so earlier correspondence has not reached them) was when they received a demand for immediate repayment and a threat of court action. In such circumstances it is impossible not to feel considerable sympathy for the tax credit customers concerned. But that is not, of itself, sufficient ground for me to launch an investigation into a case. I need to see evidence of a mistake on the part of HMRC leading to an unremedied injustice to the complainant before I intervene in a matter.
1.8 As I have indicated above (paragraph 1.5), where I have investigated complaints, there has also been a reduction in the number of cases that I have upheld. This is in part due to some of the administrative improvements in the tax credits system (see Chapter 2). We have, for example, had fewer complaints concerning customers being unable to get through to the Helpline; receiving multiple award notices that were difficult to understand; or not receiving responses to correspondence and complaints. In many instances, customers had previously pointed to such failings to satisfy HMRC that they could not reasonably have known that their award was incorrect, and thereby meet the ‘reasonable belief’ test, allowing the overpayment to be waived (see paragraph 1.3).
1.9 The improvements in the administration of the system have therefore contributed to a reduction in the number of overpayments being waived. Similarly, the reduction in the backlogs of disputed overpayment cases and complaints in HMRC led to the abandoning of its streamlined procedure for dealing with such matters (paragraph 1.3) and the return to a more rigorous approach to determining whether overpayments should be remitted (namely closer scrutiny of what the customer might reasonably have believed in relation to the correctness of their tax credit award or payments). The combined impact of those changes is starkly demonstrated in the reduction in the number of cases where overpayments have been remitted (see paragraph 3.12). What we have seen in this Office, as a consequence, are increasing numbers of complaints being referred which relate solely to the operation of COP 26 and, in particular, to the 'reasonable belief' test. I understand that this is mirrored in the make-up of the cases being seen by the Adjudicator’s Office and Citizens Advice.
1.10 I said in my first special report on the administration of the tax credits system, that I would continue to scrutinise carefully the complaints coming to me to determine whether a further special report was warranted. It seemed to me that the sometimes unfair and inconsistent application of COP 26 and the unduly harsh nature of some of the decisions on recovery I had seen, the extreme distress thereby caused to low income families, and the fact that the outcomes of those decisions seemed to fly in the face of the aims of the tax credit policy, were sufficient to warrant a further report.
1.11 I am in absolutely no doubt, from the discussions and exchanges that I and my staff have had with HMRC at the most senior levels, that they are continuously seeking to improve their own performance and the service that they provide to their customers. I am also aware that HMRC are currently in the process of restructuring in order better to meet the differing needs of their different customer groups and that they are actively putting in place mechanisms to ensure that they are able to learn more effectively from the complaints that they receive. It seemed to me, therefore, that a further report at this time which again specifically looks at the customer experience of this most vulnerable client group might provide helpful information for HMRC when considering the sorts of changes they might wish to make going forward.
3 The Adjudicator’s Office is contracted by HMRC to act as a fair and unbiased referee in respect of complaints which have exhausted HMRC’s internal complaints system.
4 HMRC have a two tier internal system for considering complaints; those who remain dissatisfied may then complain to the Adjudicator.
