A wider view
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4.1 It is clear that significant numbers of low income families and workers have benefited from the introduction of Child and Working Tax Credits since April 2003. For many, particularly those in stable employment and family structures, once the system had bedded down and the initial administrative problems had been resolved, their experience as a tax credit recipient will most probably have been positive. However, as I have shown in previous chapters, that is by no means the full story and there are many for whom the experience has been, and indeed remains, highly distressing. Whilst they may be only a relatively small proportion of the overall numbers claiming tax credits, they are a significant number, and the impact on the customers concerned, typically those on the very lowest incomes who are amongst the most vulnerable in society, is huge. It is, therefore, vital that work continues as a priority within HMRC to find ways of lessening the adverse impact that the current system can have on those customers. Otherwise, increasing numbers of those whom the system is intended to benefit most (low income families and workers) will opt out of claiming tax credits, thereby defeating the very laudable policy objectives.
Case study: 28229
‘This has caused me great distress and upset at a time when I was trying to be financially independent from state benefits and not get into any debt. It appears that working for a living as a single parent is disadvantageous. Surely this should not be the case!’
Case study: 25072
‘I do not want to receive one single further payment from you and cancel all payments regardless of so called entitlement’.
Case study: 31533
‘I have been informed over the [tele] phone that I now owe you £446.86. I thought (silly me) that WTC was meant to help the low paid but all it does is get us deeper and deeper into debt, something that both myself and my wife never do. Therefore we both wish to withdraw from the scheme right now.’
Case study: 31630
‘This is the second year in which we have received such a ‘Notice to Pay’ and we must say that it is causing us both grief and stress with the worry of the whole situation, as well as putting a strain on our marriage. …… We shall not be attempting to claim this ‘benefit’ ever again.’
4.2 The evidence in the complaints that I have seen also raises fundamental questions which are not administrative or service issues as such, but policy considerations related to the design of the tax credits system which only Government and Parliament can address. Whilst they are not for me, it is important in my view that I raise them here in this report.
4.3 I raised the first of these issues in my first special report on tax credits in June 2005; that is, that financial uncertainty is inherent in an annual system. Overpayments and underpayments are unavoidable aspects of the system which will continue to occur, however well the system is administered, because that is how the system is designed. Although this tax credits system is in its fifth year now, as I have already indicated earlier in this report, it is evident from the complaints referred to my Office that this aspect of the system is simply not understood by many tax credit recipients or even their referring Members.
Case study: 25074
‘I fail to see how, given that HMRC were notified of all the changes and acted upon them, an overpayment can possibly have been made! The fact must be, surely, that if an overpayment was made then it was made because HMRC did not, as claimed, act upon the evidence provided. Or, are we presiding over a system that is so completely flawed and incompetent as to almost inevitably in many cases result in an overpayment at the end of a financial year.’
(from an MP in support of his constituent’s complaint)
This means that the system is likely to keep generating dissatisfaction and numerous complaints, with the resulting impact on HMRC staffing and resource needs.
4.4 The annual system means that tax credit payments can fluctuate in an unpredictable manner in year, making it difficult to budget in the short term. But it also means that entitlement to the tax credits payments already made (and spent) is only finalised retrospectively, rendering longer term budgeting much more difficult. Does such a system therefore truly meet the needs of this particular customer group?
4.5 The very fact that, as a result of that process, so many low income families who would otherwise not have been in that situation end up in debt must raise concerns that, although many children may be lifted out of poverty by the tax credits system, others may be being forced into it. Whilst HMRC have taken steps to try and ensure that recovery of overpayments does not lead to severe hardship, by delaying or restricting recovery where requested and the circumstances allow, it is undoubtedly the case that some low income families and earners find the prospect of being in debt to HMRC a very worrying prospect. Others will not have the courage or confidence, even where they have good cause, to dispute an overpayment or its recovery. We have seen a number of cases where those who can least afford it have taken out new or additional loans (with high rates of interest accruing) in order to repay tax credit overpayments.
4.6 Similarly, although overpayments may sometimes (albeit infrequently - see Chapter 3) be remitted on grounds of hardship, recovery will often simply be suspended in anticipation of the tax credit recipient’s circumstances improving. Some individuals and families may thereby have the threat of recovery of sometimes very large sums hanging over them for many years. It seems to me that such a threat must provide a negative incentive for people in such a position to seek employment or improve their circumstances. Further, it directly contradicts one of the key policy objectives of the scheme, namely that of providing an incentive to work.
4.7 The aim of having a flexible system, able to respond promptly to changes in customers’ circumstances, is to provide those with low incomes with appropriate support when they most need it. However, I have seen many cases where families have only been alerted to overpayments and the need for them to repay the sums involved sometimes two or three years after those overpayments arose. Consequently, families who might already have had their current tax credit payments reduced to take account of a change of circumstances in-year, and who are already struggling to make ends meet as a result, can find themselves being pursued to repay sums received and spent a very long time ago.
4.8 This can be particularly problematic for those on the lowest incomes because, had they not received those tax credits payments at the time, they might well have been entitled (or had an increased entitlement) to other benefits such as income support or housing benefit. Because of the rules governing entitlement to those benefits, however, the tax credits claimant cannot make a backdated claim for those benefits so long after the event. Hence, those on the lowest incomes can end up, over time, receiving less than their overall entitlement to financial support and be seriously disadvantaged.
4.9 Some of those disadvantaged in that way will be taken to court by HMRC in pursuit of repayment of the sums involved. And in a number of those cases the origin of the overpayment will be HMRC error which the tax credit claimant has failed to spot. It seems to me that such instances raise fundamental questions of fairness and injustice which must be addressed.
