Summary and recommendations
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The Parliamentary Ombudsman's Annual Report for the 2003-04 business year noted that the introduction of the new Child and Working Tax Credits system by the then Inland Revenue (the Revenue) had been marred by significant technical problems which had led first to delays in payments, and then created other problems when the Revenue tried to remedy the situation. At the end of the year, although, for the vast majority of tax credit recipients, the system appeared to be working reasonably well, there still remained concerns for families on low incomes in particular in respect of the treatment and recovery of overpayments of tax credits arising both in-year and at the year-end. Although those cases only represented a very small proportion of the six million families currently receiving tax credits, it was nevertheless clear that a significant number of families were affected and that the level of financial hardship and distress being caused to some was considerable.
The Revenue assured the Ombudsman that the initial difficulties were only teething problems, which would be resolved as the new IT bedded down and staff became more experienced in operating the new system, and as both staff and customers became more familiar with the new rules. Nevertheless, the Ombudsman undertook to watch closely how the Revenue dealt with situations arising which caused hardship to families, and also to identify if complaints threw up wider issues about the systems and processes that needed to be addressed.
A year on it is clear that the Revenue's assurances were over-optimistic. Complaints about tax credits have continued to rise, and in the first two months of this business year represented almost a quarter of all cases referred to the Parliamentary Ombudsman.
It is also becoming clear that the cases considered by the Office represent the tip of a much bigger iceberg. The majority of complaints referred to the Ombudsman relate to the Revenue's recovery of money from families who have received too much in tax credits. The scale of this particular problem is demonstrated by the recently published figures [1] on overpayments at the end of the first year of tax credits. These show that, at the end of the tax year 2003-04, a third of all tax credit awards (1,879,000) had been overpaid. In all, the overpayments amounted to £1,931 million. More than half a million awards (630,000) had been overpaid £1,000 or more - including 40,000 awards where the overpayment amounted to more than £5,000. Two-thirds of overpaid awards related to households on modest incomes - families out of work with children; those on Working Tax Credit or receiving an amount of Child Tax Credit above the family element.
A review of all the cases referred to the Ombudsman shows that the greatest difficulties are suffered by the core group that the tax credit system is aimed at helping, namely families on low incomes. The majority of the problems arising appear to have two key origins:
- the design of the tax credits system itself. Awards are annual and the system has an element of financial uncertainty built into it, sometimes causing significant problems for people who have to plan carefully to manage their family budgets;
- the delivery of tax credits has been designed to be wholly IT based and does not take proper account of the needs of customers.
Design of the tax credits system
The fact that awards are annual but are not finalised until the end of the tax year, when under or overpayments of tax credits in the year are identified, means that families on modest means, who have to budget and plan their finances carefully to manage their lives, cannot easily budget ahead as entitlement to tax credits is only finalised retrospectively. In addition, in response to reported changes in circumstances in year, the tax credit computer will adjust the remainder of the payments in year so as to avoid overpayments at the year-end. However, this recovery is simply part of an automatic rolling mathematical re-calculation of an award by the tax credits computer system to ensure its accuracy at year-end. In practical terms, this has caused significant difficulties for families because it takes no account of ability to pay. Problems are particularly acute where the excess payment is large, or it is identified only a short period before year-end. In these circumstances, the re-adjustment of an award can lead to a drastic drop in payment, or payment stopping altogether.
This situation is then compounded further where there are other IT problems or clerical errors made, again resulting in significant under or overpayments. An adjustment to correct an earlier mistake may put the problem right from the Revenue's viewpoint, but the customer experience reflected in the complaints received shows that families affected can pay a heavy price in the disruption of their finances where careful budgeting is paramount. Many families report having to borrow money from family and friends to support their children, using up their life's savings or running up credit card debts in order to pay for childcare costs, buy food and get to work. One woman whose award was wrongly terminated wrote:
‘I have had to borrow money to pay my rent as the landlord was... threatening me with eviction… It has caused me so much stress and depression’.
Another woman facing an overpayment of over £5,000 wrote:
‘I cannot buy sufficient food for my three young children never mind my husband and myself. Not to mention the increasing credit card bills which are coming through the door. We are in the process of re-mortgaging our house to cover payments for credit card and loan repayments. My husband and I are at breaking point due to the pressure and stress… ’
Although the Revenue has attempted to deal with interruptions in payment by making manual interim payments, these have not always been regular, have been subject to processing errors and have led to other system problems. The Revenue has also introduced additional tax credits (ATC) payments for families where recovery of excess or over payments is causing financial hardship. However, families have to apply for those payments, which are in any event also recoverable starting in the following year. The Revenue has also introduced a Code of Practice (COP26) which describes, amongst other things, the circumstances in which the Revenue will decide not to recover all or part of an overpayment due to official error. However, this is only activated at the customer's request, there are significant delays in decisions being made, and it requires Revenue staff to make a largely subjective decision as to whether it was reasonable for the claimant to believe that the award was correct.
Delivery of the tax credits system
The actual processing of tax credits claims is wholly IT based. Most tax credits claims are now captured electronically, claims are then automatically checked and processed, the entitlement calculated, a decision notice produced and sent out and payment made - all without clerical intervention or review. Whilst this is intended to produce a streamlined and efficient service, the customer experience suggests that it is not meeting the needs of many families on low incomes. The system appears unable to provide an immediate, responsive and appropriate service, particularly when things go wrong. Problems identified include:
- poor information on award notices; which makes it difficult if not impossible for customers to work out their entitlement;
- the issue of a multiplicity of such notices, which adds to customer confusion;
- poor communication with customers: currently, when a problem occurs, communicating with customers often appears an afterthought rather than an important part of the process of reaching a solution.
- poor accessibility, customers continue to report serious difficulty in contacting the Revenue to get queries answered or problems sorted out; telephone lines are engaged, letters are not responded to;
- inability for customers to get through to someone who can explain what is happening: Helpline staff are unable to access a full claims history or say where cases are in a queue waiting to be resolved;
- delays in dealing with appeals and complaints.
Unsurprisingly, families reliant on tax credits feel deeply frustrated and anxious about their inability to establish their position, or to find out how long it will be before matters are sorted out.
The significant impact this whole experience can have on low-income families is underlined by the fact that, in total, the Revenue has paid out well over £1 million in compensation for delay, hardship, inconvenience and distress. In 2003-04 10,820 tax credit customers received compensation amounting to £309,000.[2] In the nine months up until December 2004, 14,400 customers had been paid compensation, amounting to £912,000 in total.[3]
This sort of customer experience appears to be undermining the very laudable policy intentions behind the tax credits system.
A customer who had been notified she had been overpaid but who, after the Ombudsman's intervention, had then been found to have been underpaid wrote:
‘… after careful consideration I have decided not to re-apply for tax credits in the new 2005 financial year despite being eligible to do so. The reason is that I have absolutely no confidence that the TCO will be able to administer my case efficiently or most importantly, accurately.’
Conclusions
The new tax credits system has brought the Revenue a new customer group which has created fresh challenges for the Revenue which it has yet to meet.
The customer experience, as reflected in the complaints referred to the Ombudsman, raises the fundamental issue, which is for Government and Parliament to address, as to whether a financial support system which includes a degree of inbuilt financial uncertainty can truly meet the needs of this particular group of families. It also suggests that, if the system is intended to meet those needs, then a much improved level of customer service is required in the form of better and clearer communications, easier and quicker customer access to Revenue staff who can address problems and queries, and prompt and efficient complaint handling. Without these, a sizeable group of families will continue to suffer not only considerable inconvenience, but also significant worry and distress.
The tax credits experience also provides important lessons for the future design of major IT projects for all public bodies, but particularly in the social welfare field. It demonstrates the importance of making consideration of all potential customers a central element from the start. The intelligibility of information to customers, good communication, and effective mechanisms to deal with things that go wrong should not be afterthoughts, but central and built into the system design.
Recommendations
The problems caused by certain aspects of the tax credits system require prompt action. The Ombudsman's report makes 12 specific recommendations:
1. Steps should be taken to ensure that tax credits staff who are in direct contact with customers recognise the situations where interim payments of tax credits may be appropriate, so that payments can be put in place promptly to prevent financial hardship. (Paragraph 3.41)
2. The Revenue, having taken steps to ensure that future payments of tax credits properly take account of current circumstances, should not seek to recover either an excess payment made in the current year, or an overpayment from the previous year, until it has come to a decision, based on all the relevant facts, as to whether or not the excess amount paid should be recovered in accordance with Code of Practice 26 (COP26). (Paragraph 5.17)
3. As a minimum, on the 'payments page' of an award notice, customers should be alerted to the fact that recovery of an overpayment (in-year or at the year end) of tax credits can be challenged, if the overpayment was due to official error and in circumstances where a customer reasonably thought they were being paid the correct amount. That note should also draw customers' attention to COP 26 and the fact that, if they want to dispute an overpayment, they need to complete form TC846. (Paragraph 5.21)
4. Where it is decided that an excess payment in-year is recoverable in accordance with COP 26, recovery should be at the same rates as those for previous year overpayments. (Paragraph 5.29)
5. Steps should be taken to ensure that all Revenue staff who have contact with tax credit customers are alert to the circumstances when Additional Tax Credits (ATCs) might be appropriate, so that they can invite an immediate claim. (Paragraph 5.30)
6. Where in-year recovery of excess tax credits is justified, the Revenue should take steps to pay ATCs automatically to families in receipt of Income Support and income-based Jobseeker's Allowance. (Paragraph 5.30)
7. Details of the availability of ATCs should be printed prominently on the 'payments' page of an award notice (where details of in-year recovery also appear); and the issue of financial hardship (and how the Revenue can help) be given greater prominence in the guidance notes which accompany an award notice. (Paragraph 5.30)
8. Customers who have been paid too much in tax credits, whether identified during the year or at year-end, should be sent a letter outlining:
- the total amount they owe;
- the reasons why the overpayment or excess payment in-year occurred and the date or dates when it happened; and
- the repayment arrangements which will apply in their case.
The letter should enclose a copy of COP 26, and draw particular attention to the circumstances when recovery can be waived and the availability of ACTs in cases of hardship. (Paragraph 5.41)
9. Whenever a Revenue mistake or error is identified which has led to too much in tax credits being paid, the customer should be immediately notified of exactly what has happened and informed of the circumstances when recovery can be waived. (Paragraph 5.51)
10. Consideration should be given to writing off all excess and overpayments caused by official error which occurred during 2003-04 and 2004-05. (Paragraph 5.61)
11. Consideration should be given to the adoption of a statutory test for recovery of excess payments and overpayments of tax credits, consistent with the test that is currently applied to social security benefits, with a right of appeal to an independent tribunal. (Paragraph 5.65)
12. The Revenue should reconsider the way it organises delivery of tax credits in order to deliver a better, more complete service to the customers it now serves. A different model is needed in complex cases and where something has gone wrong. More sustained and informed communication with customers about their case is essential, as is a 'whole case' approach to investigation to ensure a tax credits award is correct. (Paragraph 7.14)
Footnotes
1 Child and Working Tax Credits Statistics, Finalised awards 2003-04, Supplement on payments in 2003-04, HM Revenue and Customs Analysis Team, National Statistics, 2005.
2 Hansard, 18/11/2004, col 1711-1712, and 18/1/2005, col 830W
3 Hansard, 18/2/2005, col 830W and 31/1/2005, col 599W
