Appendix C: Correspondence between The Ombudsman and the Revenue about wider tax credits issues

Text of letter from HM Revenue and Customs (17 February 2005)

Thank you for your letter of 31 January about your plans to produce a special report on tax credits.

Before getting into detail, it may be worth remembering that the new tax credits operate in a completely different way from their predecessors. Entitlement to Child and Working tax credit is contingent on current tax year income, and is finalised after the end of the year. This means that the normal operation of the system will require end-year adjustments in many cases, either to pay out tax credits previously underpaid or to recover an overpayment. The design of the system does of course seek to minimise the numbers of overpayments, and reduce the amounts involved, by leaving out of account in calculating the current year's award the first £2,500 of a rise in income. Our initial findings indicate that the majority of the overpayments for 2003-04 are the result of changes in the family's situation (mostly increases in family income of more than £2,500 which is not surprising given that most 2003-04 awards were based on income for 2001-02) rather than of Inland Revenue or IT error.

Where an overpayment is identified at the end of the year, it is normally recovered from continuing tax credit payments, subject to the safeguards set out in our Code of Practice 26. We are monitoring the operation of the system so that we can learn how best to help claimants understand how to avoid unexpected overpayments that can lead to problems with recovery.

We have, of course, as you identify in your letter, had particular problems with the IT support for tax credits, many of them leading to overpayments outside the normal run of the system, and the cases that you are seeing will reflect those early problems. Sometimes the problems become apparent as awards are finalised so the process of renewals can also bring the effects of problems to light. Some cases can also take a while to reach your office because they have been subject to an appeal or have first gone through the Adjudicator's office. Having said that, we are now confident that the system is stable and have a number of strands of work in hand to improve claimants' experience with tax credits - I will cover those in more detail below.

You wanted information about the nature of the problems that had been experienced. In paragraphs 2.10 - 2.14 of his Standard Report 2003-04, the Comptroller & Auditor General describes the problem that was encountered when the NTC system failed to recognise that certain tax credit payments had been made, resulting in future payments being higher than they should have been. As described within that Report, payments of £300 or less were written off, not being added to the record of the claimants who had received them. Consequently, more than 80% of the households who had received additional funds did not become overpaid at the year end as a result.

In addition, an isolated system problem which meant some income figures were erroneously omitted from entitlement calculations resulted in some 60,000 households receiving incorrect (higher) payments for 2003-04 or 2004-05 or for both years in some instances. These overpayments total some £80m. The system problem has been fixed successfully and no new cases have arisen.

We have sometimes had difficulty in processing individual cases through the system or handling changes of circumstances. Where this has occurred, we have where necessary paid people clerically to ensure they were not out of pocket but this has still given rise to complaints. Our priority is to put things right and resume payment automatically via the tax credit system as soon as we can, paying compensation to claimants where appropriate to acknowledge any worry or distress we have caused them.

I would like to emphasise that cases in which problems have occurred have been the minority - the system has successfully handled millions of cases since we went live. And where there have been difficulties we have reacted quickly to handle them and mitigate the effect on claimants. Where a system fault has led to families having difficulties, because they did not receive their award at the correct time, we have issued giro cheques. Where we adjust a family's payments during the year to avoid paying them too much tax credit at the end of the year, and this causes them hardship, we have introduced additional payments to bring their tax credits back to a higher level. The Code of Practice 26, which covers our policy on handling overpayments, sets out who can receive these additional payments.

I said that I would set out the work we have in hand to make improvements. We have been working to respond positively to many of the recommendations made by the Revenue Adjudicator in her report last summer into some of the same issues I know you want to review. In addition, the Public Accounts Committee have also considered the same issues on two occasions.

A key area on which we have been concentrating is improving our complaints handling, including handling disputed overpayment cases. We have improved our processes to speed up handling and bring cases to a resolution. A dedicated team, the Tax Credit Office Resolutions Team, handles the clearance of complaint cases, such as the ones you refer to us, to the point where they are resolved.

• In addition to the measures we put in hand to deal with immediate problems, we have tried also to address wider issues, learn lessons from our experiences and achieve improvements in our overall performance. So we have, for example, opened two new contact centres, to enable us to deal with customer calls, in particular, during the renewals period. We also extended the period over which people could provide their renewals information. These actions meant that the end of year reconciliation process ran smoothly.
• We have also revised our guidance in Code of Practice 26, which covers our policy on handling overpayments, and the Adjudicator observed that it 'reflects what I consider to be a fair and proper approach to the sensitive issue of overpayments and their recovery.'
• In parallel, we are working on improving the quality and manner of our communications. The claim form is simpler than it used to be, and we have undertaken extensive testing to find out how user friendly it is, including filming people completing it to test the relevant processes. We also provide a lot of help with the form if people need it - comprehensive guidance which comes with the claim form, or on the website, advice from the Helpline and face-to-face help at IRECs and Jobcentre Plus offices.
• We are determined to improve the information and clarity given on our award notices, and we have consulted extensively with representatives of our Consultation Group about the award notice and aim to introduce a significant number of improvements towards the end of 2005-06. Some improvements will be introduced in April 2005 with other changes to come on line in tandem with the appropriate IT software changes.
• To cover the period prior to these improvements being made, we have produced an explanatory sheet intended to help advisers and claimants understand the various elements of the payments page of the award notice. This explanatory sheet is sent out with award notices. Our Tax Credit Consultation Group has warmly welcomed the explanatory sheet that reflects a number of their suggestions.

We obviously need to continue to work on improving the service we provide our customers. However, I believe that the steps we have taken in the recent past are a good start, and I hope that you start to see some evidence of this as you carry out your review. I do however fully recognise that much of it will not be relevant to the many live cases you have been dealing with which are in fact, examples of many of the problems we have been working to address. I understand that you have recently notified us of a large number of assistance cases which you propose to pass to us shortly: if when we have had a chance to look at them it turns out that they raise new issues I will write again.

David Varney
Chairman

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Second letter from HM Revenue and Customs (21 April 2005)

I am now able to provide the information you requested. For simplicity, I have followed your headings.

How are overpayments and their causes measured?

In his letter of 17 February 2005, David Varney advised that the majority of the overpayments for 2003-04 were the result of changes in the family's situation, primarily increases in income greater than £2,500. In this context, the term ‘overpayments’ related only to balances identified after the end of that year, being the difference between final entitlement following the finalisation of an award, and the payments made during that year.

You asked for some further information about our statistics on the causes of overpayments. As mentioned above, overpayments are not finally determined until an award is finalised. Some claimants had until 31 January 2005 to finalise their award for 2003-04, so the collation of comprehensive statistics has only just become possible. We will be publishing details of the level of overpayments as at 5 April 2004 at the end of May 2005, under National Statistics. These will include any overpayments that occurred as a result of our error. However, as you correctly suggest, we cannot easily identify the reasons why an overpayment arose, and to examine each award would be prohibitively expensive in terms of resources. We do not yet have sufficient data to allow us to publish information on the causes of overpayments. However, we have sought early indicative data from a small-scale sampling exercise (and also conducted research with individual claimants to understand why they built up overpayments in 2003-04) and it is from these sources that we have derived our first indications of the causes of overpayments.

A summary of the main computer problems

You asked for a more detailed picture of the nature and extent of the computer problems that have occurred.

You are aware that there were some well-publicised problems in the early days when the system did not perform as expected. With a system of this size and complexity there will, from time to time, be glitches. However, the system has worked throughout the entire period since tax credits were introduced and has been stable for some considerable time now. With our IT partners we work hard to ensure the smooth delivery of tax credits and we have arrangements to deal with any problems that arise - working together to react quickly to problems, identifying and taking whatever action is required to resolve them.

There are regular, planned, upgrades and releases of software to add new functionality for the tax credits cycle. For example, during 2004-05 we successfully completed the first annual review and renewals exercise. This involved finalising millions of awards made in 2003-04 and working out whether claimants had received their correct entitlement - we did this for those whose award ended in 2003-04 as well as for those who had a continuing entitlement into 2004-05. During the renewals period, we made sure that claimants were not without money by continuing to pay them on a provisional basis, adjusting the rate of payment when each claim was renewed. Most customers only had a couple of pages of information about their circumstances to check and a very short form to complete to tell us about their 2003-04 income and to confirm that their circumstances were correct. We also allowed customers to renew by 'phone and the vast majority of our customers found this quite straightforward.

David Varney mentioned two major software problems we have faced in his letter to you of 17 February.

‘Contra’ cases

I don't feel I can add anything to what is in paragraphs 2.10 - 2.14 of the Comptroller & Auditor General's Standard Report 2003-04. Those paragraphs describe the problem that was encountered when the NTC system failed to recognise that certain tax credit payments had already been made, resulting in duplicate payments being issued. As outlined within that Report, payments of £300 or less were written off, not being added to the record of the claimants who had received them. Consequently, more than 80% of the households who had received additional funds did not have to repay anything. We also wrote to those households where we intended to take account of the extra payments, pointing out our error, drawing their attention to our Code of Practice 26 and asking them to call us if they reasonably believed their payments were correct.

‘Incorrect Income’ cases

In addition, early in 2004-05 we identified an isolated system problem, which meant some income figures were erroneously omitted from entitlement calculations. This resulted in some 60,000 households receiving incorrect (higher) payments for 2003-04 or 2004-05 or for both years in some instances. These overpayments total some £45m. The system problem has been fixed successfully and no new cases have arisen. When we corrected our error, we wrote to claimants who were affected explaining how the overpayments would be recovered and what claimants should do if they wanted us to consider writing off the overpayment under our Code of Practice 26 ‘What happens if we have paid you too much tax credit?’

Other problems

More recently, but on a much smaller scale, we have managed some other operational issues caused by IT problems. I do not believe they fall in the category of ‘major software problems’ but I thought it would be helpful to outline the issues.

Employer Funding Delays

A small number of employers paying tax credits through the wage packet seek advance funding from the Revenue (employers normally pay tax credits by using the funds they have deducted from their employees for Income Tax and NIC). At the end of March 2005, when we did an End of Year run, we had a system problem in calculating the funding for employers. For the majority it was successfully completed but some funding payments for April arrived in employers' bank accounts a few days later than normal. When we recognised that there could be a delay with the payments for some employers, we took positive action to contact each of the employers affected to discuss the position. Most reported that the delay would not cause them a problem and would not affect their ability to pay any credits due. We arranged prompt payments for the small number of employers who needed them urgently. And all outstanding payments were made by 13 April.

‘Incorrect Payment’ cases

A new issue recently came to light with regard to provisional payments for some single adult households for 2004-05. The error was an unforeseen consequence of the fix applied to correct the Incorrect Income cases mentioned above, which was a problem affecting joint claims and some single householders with multiple income sources.

Some provisional 2004-05 payments for single adult households were not based on the latest income figure the claimant had given us (most often when finalising their 2003-04 award), but on the original 2001-02 income they provided when they first applied. For the group affected, the system incorrectly treated the 2001-02 income figure as if it were the latest we have received as far as 2004-05 award calculations were concerned. It also means that the 2001-02 income was initially used incorrectly to set up the provisional payments for the 2005-06 award.

The errors affected some 36,000 awards - 32,000 have received overpayments and 4,000 who were underpaid. The estimated amounts involved are just over £21m and £3m respectively. Preliminary analysis of the overpayments show that 20,000 are of less than £600, 5,000 between £600 and £1000, 5,000 between £1000 and £2500 and 1,200 over £2500.

We discovered this matter only recently. We quickly corrected the potential underpayment cases and arranged to make additional lump-sum payments. Had we sought to correct the position for those who were being overpaid so late in the 2004-05 year, payments might have stopped altogether for some claimants. We therefore decided not to initiate any action that would have lead to a reduction in, or stopping of, payments for the rest of 2004-05. But we took effective action to re-profile awards to set up the correct level of provisional payments for 2005-06 to avoid causing an overpayment in this year, and issued fresh award notices to affected claimants showing them what level of payment to expect for 2005-06. We are currently considering how best to handle the overpayments for 2004-05 but do not propose to take any recovery action before claimants finalise those awards during 2005-06.

Annual Balance

An IT error during the Account Balance we undertook for tax credits (alongside all IR systems) in October 2004 resulted in incorrect payment posting entries being made to some claimants' records. We identified (and quickly corrected) a problem where, after we had carried out the annual balance, we had amended the records of around 60,000 claimants - for example, to note a change of circumstances they reported. Of these, around 2,000 received overpayments totalling approximately £400,000. And a further 7,000 households (where entitlement had already ended) received an incorrect notice showing an overpayment. We wrote to these two groups to tell them about our mistake, sent them a copy of our Code of Practice 26 and described what they should do if they wanted us to consider writing the overpayment off. For the vast majority who simply received incorrect information on an award notice, we corrected their records and sent them a revised award notice.

Ceased cases

We have an emerging issue where, in certain situations, the system has incorrectly overwritten the end date set on a tax credits award with the result that, when the records are subsequently amended, it appears further payments are due. We've identified fixes and are in the process of detailed investigation. I will let you have further details when we have completed our analysis, if you wish.

‘Fatal errors’

You may have recently seen the Parliamentary Question concerning a ‘fatal error’ message that our staff sometimes see when they access a claimant's record. It means they could not see details about the customer concerned at that time and were consequently unable to make changes to the award on the computer system. It is not possible to provide the number of awards that may have been affected at some time by this type of error. The vast majority of ‘fatal errors’ are resolved by trying to access the records again and do not affect the claimant's payments or lead to overpayments. But we do have a small number where we either cannot calculate the award at all, or where there is no payment schedule meaning that we cannot get them into automated payment. We make arrangements for claimants to receive manual payments in these circumstances.

Conclusion

I would like to emphasise that customers who have been affected by our IT system problems have been in the minority - the system has successfully handled millions of payments day in, day out, since we went live - but, as I said earlier, with a system of this size there will, from time to time, be glitches.

Aside from the particular software problems explained above, and as David Varney mentioned in his letter, we sometimes experience isolated difficulties when processing individual cases through the system, or when handling changes of circumstances. Our priority is to put things right and resume payment automatically via the tax credit system as soon as we can but, where necessary, we will make manual payments while we work to correct the problem. But teething troubles have still given rise to complaints and the result of these types of difficulty are reflected in the examples to which you refer in your letter.

You have quoted some specific examples of the types of problems you have seen in cases referred to you. Some of these are not instances of IT problems, but result from human error. For example, on occasion, staff making changes to records have incorrectly deleted details relating to a child. These errors occur if our staff do not follow the correct process to update the tax credits computer system with more recent information about children.

Code of Practice 26

You have asked for more details on the introduction, and revision, of Code of Practice 26, including the introduction of guidance and training for staff on handling disputed overpayments and making additional top-up payments.

The Code of Practice 26 was introduced to fulfil assurances given by the Government during the passage of the Tax Credits Bill through Parliament. The first edition was published in December 2003 and a revised version was published in August 2004. We send a copy of the Code of Practice to claimants who query an overpayment, or who ask for advice on what to do if they do not feel they should pay back all, or part, of an overpayment. General guidance on dealing with overpayments and additional tax credit payments is in the New Tax Credits Manual in the sections headed ‘Overpayments’ and ‘Additional tax credit payments’, respectively. The manual is available on the Inland Revenue website at www.inlandrevenue.gov.uk.

We began to deal with requests for additional tax credits payments (atcp) in October/November 2003, when the need to top-up reduced payments arising from in-year adjustments became apparent, and we set up a dedicated team in the Tax Credit Office to deal with this work. From August 2004 revised atcp procedures were introduced, in line with the revised COP 26.

Guidance on official error relief was made available to staff in May 2004, in time for handling the finalisation of 2003-04 awards. A dedicated team was set up to consider claims to waive recovery of an overpayment on the grounds of official error so that expertise is developed and consistency maintained. The procedures were rolled out to the staff on that team after being tested.

Training was provided to both these dedicated teams by means of pre-reading and workshops and the teams had ongoing support from mentors involved in the original testing until they were comfortable with the new procedures.

Information to claimants

In his earlier letter, David Varney mentioned the improvements we are making to the award notice, and you have requested further information about these. Award notices for 2005-06 include revised formatting to present information in a clearer fashion. But the major changes will be brought in from April 2006. These include:

• a much simpler and clearer summary on the front page that focuses on the most relevant information for the customer - what sort of award notice it is, what it is in response to and how much money they are going to get for the remainder of the year.
• relevant personal circumstances about the claimants and their children upon which we have based our assessment of their entitlement set out in Part One. We ask them to check these carefully and also remind them to report any changes in the future. Part One also sets out the information about their income in a clearer way, showing a breakdown between different types of income. That makes it easier to check. And we have made it clear which year's income we have used and how to work out if they need to tell us about a likely change in their current year's income.
• A revamped Part Two that sets out in the clearest possible way how we have calculated their entitlement to tax credits. This will show where amounts have changed - for example, if they have had a baby during the year - and the relevant period of time that the entitlement covers. It will now be possible for customers to check that we have taken account of the right changes for the right periods. Part Two will also show by how much their entitlement based on each element has been reduced by their annual income.
• An explanation in Part Three of what payments we will make for the remainder of the year and how this relates to the claimant's entitlement as calculated in Part Two. For many this will be very straightforward. But for a significant minority, this is more complex, requiring us to take account of overpayments from previous years, in-year adjustments to avoid hardship and the carry forward of overpayments to future years.

We believe that we will then have a good layout and structure that will cope with the large majority of individual situations and make sense to most customers and their advisers - a copy is enclosed for your information. We have worked closely with our tax credits consultation group. Several meetings and workshops have been held with national representatives and local advisers and caseworkers to take full account of their views in working up the new design. And they have since indicated both at meetings and in writing that they regard the new design as a significant improvement.

You have already seen the explanatory sheet, TC 602PE, and I can confirm that this is what is referred to on the final page of David Varney's letter. This information was incorporated into the guidance notes issued with award notices, from November 2004.

In the Annual Report of The Adjudicator 2004 there is a mention on page 14 of a 'flyer' issued with amended award notices, and you have requested a copy. The flyer is known as form TC 820 and a copy is attached. I would mention that the purpose of this leaflet was to alert claimants to the availability of additional tax credit payments and it set out the action claimants should take if the amendment of their tax credits award late in the year resulted in hardship. We started to issue the flyer on 16 February 2004. The information was then incorporated into our revised guidance notes issued with all award notices, from April 2004, at which time the issue of the flyer was no longer necessary.

You ask what information claimants receive regarding an overpayment when they are first notified and if they ask for a full explanation of how the overpayment occurred. The amount of any overpayment, and how it will be recovered, is shown on award notices we send to claimants whenever we make or amend an award. Claimants can call the tax credits helpline to obtain an explanation of their overpayment. If they want a more detailed explanation, or to receive the explanation in writing, the helpline adviser will arrange for the Tax Credit Office's Overpayments Team to write to the claimant with the details.

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Complaints

You asked a series of questions seeking statistics about complaints and disputed overpayments and these may, perhaps, be best answered in a Q&A format.

Q1. How many calls to the Tax Credit Office customer complaints line are being made on average per week, and of these, what proportion are answered and what proportion are lost due to the lines being engaged?

A1. At present the customer complaints line is not supported by sophisticated call centre-type equipment, although we are looking to install that in the very near future. Consequently we do not have the same comprehensive data about callers and call volumes as we hold for the Tax Credits Helpline. Our telephone service provider cannot currently supply us with reliable figures for calls to the customer complaints line to enable us to answer this question fully. We do know that we answer an average of 100 calls a day on the line, and that demand is currently exceeding our capacity.

Over time, customers have come to use the customer complaints line as a route for resolving more complex issues that are not actually complaints at all. In order to increase our capacity to deal with calls about both complaints and more complex issues, the Tax Credit Office now has a separate, dedicated team to do this work. The existing customer complaints line has thus been freed up exclusively to handle calls about complaints. These two teams work together closely on particular queries and issues, as appropriate.

Q2. How many staff were dealing with levels 1 and 2 complaints in March 2004; and are dealing with complaints now?

A2. There were around 200 staff dealing with Tier 1 and 2 complaints as at 1 April 2004, and this had been doubled to nearly 400 at 1 April 2005.

Q3. How many staff were there in the Director's Complaints Team in March 2004, and how many now?

A3. There were around 20 staff in the Directors Complaints Team in March 2004. This had increased to nearly 60 by the end of March 2005.

Q4. How many complaints relating to tax credits have been received by the Revenue in each of the four quarters of 2004-05 to date?

Q5. How many have been resolved?

A5. To end February 2005 around 48,600 cases have been dealt with. This includes some carried over from 2003-04.

Q6. How many complaints are currently awaiting resolution at a) level 1; b) level 2; and c) level 3? What is the average waiting time at each level?

A6. Figures to end February 2005 are a) 3,500 b) 600 c) 300. An average waiting time at each level is not available, as this is not data we collect. In the 11 months to end of February 2005 around 56% of tier 1 and tier 2 complaints handled by the TCO were dealt with within 15 working days against an aim of dealing with 80% within 15 working days.

Disputed Overpayments

Q7. What are the latest figures on cases where a decision has been made on a disputed overpayment: in how many cases has a decision been taken to remit an overpayment a) in full or b) in part?

A7. About 68,500 requests (of some 165,500 requests for official error relief received) had been decided by end of February 2005 and around 10,500 families had their overpayment written off. Presently, we are unable to provide a breakdown of those that were remitted in full or in part.

Q8. How many cases are currently awaiting a decision concerning a disputed overpayment, and what is the average time currently being taken from receipt of a request to reconsider recovery to a decision?

A8. We had around 97,000 disputed overpayment cases on hand at the end of February 2005. We have streamlined our procedures to enable us to deal with cases much quicker and further streamlining measures have been introduced from 13 April 2005, so that we can catch up the backlog over the summer. We are writing to you separately, setting out the changes we have introduced in the way we handle disputed overpayment cases.

Q9. Does the Revenue make any distinction in its statistics concerning disputed overpayments between end of year overpayments and in-year adjustments where claimants wish to challenge the amount being recovered in-year?

A9. No, the statistics we have cover both year-end overpayments and in-year requests for official error.

Q10. In what proportion of cases where remittance of an overpayment has been granted has the Director's Complaints Team been involved?

A10. This information has not been recorded and is therefore not available.

Q11. Of those cases where remittance of an overpayment has been granted, in how many cases are manual payments being made to effect the remittance because of a lack of IT functionality in this area?

A11. The IT functionality to remit overpayments has been available since 8 March 2005 and, in most cases, we are remitting overpayments on the computer system. Prior to that date, we did issue manual giro cheques in around 2400 cases to give effect to the decision to grant official error relief.

In-year adjustments

Q12. How many tax credit recipients were having in-year adjustments to recover excess amounts paid, as at 30 June; 30 September; 31 December and at present?

A12. The tax credits system is designed to be responsive to changes in circumstances during the year and adjustments to keep payments in line with latest entitlement are a feature of the system. Information on the number of in-year adjustments is not available.

Q13. How many of these were receiving additional 'top-up payments'?

A13. Code of Practice 26 explains that, in certain circumstances, we will make additional tax credits payments where a reduction in payment causes hardship when we adjust entitlement following a change of circumstances in the year. The total number of such cases in which additional payments were made in 2004-05, to end February 2005, is around 7,000.

Appeals

Q14. How many appeals have been lodged against tax credit decisions, and how many appeals heard by tribunals?

A14. Since the introduction of the new tax credits, and up to the end of February 2005, the Tax Credit Office's Appeals Team had registered around 73,000 appeals. Around 2,900 appeals have been referred to the Appeals Service and, of those, 300 are still with them (the rest having been heard and decided).

Q15. What is the average length of time between receipt of an appeal and the appeal hearing?

A15. Most appeals do not require a hearing as they are settled by agreement with the appellant. The length of time over which we seek to reach agreement can vary significantly. In addition, we are dependent on the Appeals Service to organise any formal hearing that is required. Consequently we do not measure average times.

Nigel Jordan
Assistant Director

Footnote

50 Includes Tier 3, which are handled by TCO Includes Tier 3, which are handled by TCO but may not be received directly by them, e.g. Chairman, Ministerial. but may not be received directly by them, e.g. Chairman, Ministerial.

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