Introduction
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1.1. In April 2003 the Inland Revenue (now HM Revenue and Customs - but I shall refer to the Department in this report as ‘the Revenue’) introduced Child and Working Tax Credits as part of the Government’s programme to modernise Britain’s tax and benefits systems. The new tax credits system has the very laudable key aims of helping to tackle child poverty, through income-related support for families with children, and encouraging more people into work by ‘making work pay’. The scale of this undertaking must not be underestimated. It is a major project which affects around six million families, using a processing system which is wholly IT based. In the light of that, the introduction of the system was, for the most part, successful.
1.2. However, as I reported in my Annual Report for the 2003-04 business year,[4] it was clear from the complaints about the new tax credits system referred to me, that that was not the whole story. The first year of tax credits had been marred by IT problems which had led to delays in commencing payments. The Revenue had sought to deal with the financial difficulties caused to the families affected by making ‘interim payments’ by girocheque. Later, when the initial IT problems were resolved, the computer-generated awards failed to take account of manual payments made in the meantime. As a result, these families were overpaid and found their tax credits adjusted to recover the excess. This caused further financial difficulties - alleviated by the introduction of additional payments of tax credits, designed to prevent hardship. Later in the year, I received further complaints about the recovery of excess payments as a result of in-year adjustment of awards.
1.3. I had been assured that the initial difficulties were teething problems, which would be resolved as the new IT bedded down and staff became more experienced with the new system, and as both staff and customers became more familiar with the new rules. In the light of that reassurance, I decided not to conduct a specific review of the administration of tax credits, in order to give the Revenue time to sort out its difficulties.
1.4. One year on, the influx of complaints on tax credits has risen dramatically. In the year to 31 March 2004 I had received 37 complaints; at the end of the following year I had received a further 216 complaints. From being just 3% of the workload of the Parliamentary Ombudsman in 2003-04, in 2004-05 complaints about tax credits rose to form over 9% of total complaints to the Parliamentary Ombudsman. During this business year, tax credits complaints currently account for over 23% of all Parliamentary Ombudsman business. Of the tax credit investigations concluded, the rate of complaints upheld has been far higher than is usual, some 78% of them having been upheld at least in part in the last business year, compared to the general rate of complaints upheld last year by the Parliamentary Ombudsman, which was around a third. See Appendix A.
1.5. The complaints I have received show that problems with tax credit have continued, causing major difficulties for many families on low incomes. A significant concern in the last 15 months has been the number of people complaining of sudden large reductions in their tax credits awards to recover overpayments which they argue were caused by ‘official error’. Issues about overpayments have featured in 67% of the complaints I have received about tax credits - see Appendix A.
1.6. In the light of the volume of complaints I have received and the issues they raise, I have decided to publish this special report to review what has gone wrong, the impact on customers, the effectiveness of the Revenue’s response, and the wider lessons that need to be learned for the future.
1.7. My office sees only a tiny fraction of tax credit cases. By definition, they are the ones where problems have arisen. Yet experience suggests that, when there has been such a large upsurge in cases to my office, they almost certainly represent the small tip of a much larger iceberg. I am strengthened in this belief by reports from MPs, that complaints about tax credits are now one of the largest constituency issues they have to deal with.[5] I am aware that advice organisations such as Citizens’ Advice have also faced large increases in the volume of people coming to them for advice about their tax credit awards. The Revenue itself has had to double the number of staff dealing with overpayments and complaints in the last year, whilst the Adjudicator - who independently investigates complaints that have been fully considered by the Revenue - has seen her workload on tax credits grow from almost a third of the complaints that her office received in 2003-04 to over a half in 2004-05.
1.8. I would not, however, wish to imply that the whole tax credits system is in disarray. As I have already indicated, the introduction of the new system was clearly a massive undertaking, which has, in the main (and after initial teething problems), been successful. I accept the assurance of the Revenue Chairman, David Varney, who advised me in February 2005 that the cases in which problems had occurred have been a minority. However, in the context of six million tax credits customers, even a small minority can still represent several hundreds of thousands of households on modest incomes. It is now clear, for example, that at the end of the first year of tax credits, 713,000 households had been underpaid a total of £464 million. At the same time, a third of all tax credit awards (1,879,000) had been overpaid a total of £1,931 million.[6] Not all these cases can be classed as problematic, as under- and overpayments are built-in elements of the new tax credits scheme and to be expected. Nevertheless, the scale of the figures does point to difficulties in the first year affecting hundreds of thousands of tax credits households
1.9. There is no doubt that the Revenue has taken steps to minimise the effects of its technical problems on its customers, and it now has in place a Code of Practice to deal with disputed overpayments and cases of hardship. It has introduced measures to improve its accuracy rates. It has drafted in extra staff and opened new call centres to cope with extra workloads. Most recently, it has put in place new streamlined procedures designed to reduce the backlogs to disputed overpayment cases. It has also worked closely with user groups to plan improvements in the information it gives to customers, notably the tax credits award notice. All these measures have helped, and will lead to improvements.
1.10. However, I believe the complaints I have received suggest that this is not enough and that there are wider and more fundamental issues which need to be addressed. These concern the treatment of the key groups intended to benefit from the tax credit reforms: poor families with children and low income earners. They also relate to the basic principles of fairness which should underpin the implementation of public policy.
1.11. The introduction of tax credits has brought the Revenue a new group of customers. These are people who rely on the payments made by the Revenue as an essential part of their family income. They include just over half a million out-of-work families for whom, alongside Child Benefit, Child Tax Credit is the main source of financial support for their children. Their number will shortly be swelled by a further 800,000 families, who currently receive their Child Tax Credit through Jobcentre Plus, but whose awards are due to be transferred to the Revenue during the course of 2005-06. They also include 1.5 million low income working families, who are receiving the maximum Child Tax Credit and also Working Tax Credit. They may not be the majority of tax credits customers, but these are families of modest means, where the award of Working Tax Credit, alongside Child Tax Credit, makes the financial difference between working and not working.[7]
1.12. These families are also the ones who are likely to have a closer relationship with the Revenue than other tax credit recipients, by virtue of the fact that their awards, containing a greater number of different elements, may therefore more often be subject to change. Families on lower incomes are more likely to move between benefits and work. Work itself can be more insecure, with people moving from job to job, or with varying hours and pay. A parent may become eligible for tax credits as a result of a drop in income caused by relationship breakdown; she/he may later have a new partner. New children may enter the family. Childcare arrangements can alter - from part-time, to full-time, to after-school arrangements or to include vacation schemes. All these changes can affect the level of an award. This compares with the two million customers on higher incomes who receive only the family element of Child Tax Credit.[8] Here, provided there remains a child in the family, the award is largely unaffected by other changes of circumstance, including income, up to around £50,000 a year.
1.13. The new customer group has created fresh challenges for the Revenue, which it has yet fully to meet. The reliance of modest income families on tax credits, both to support their children and to sustain employment, makes it absolutely essential that, as far as is possible, an award is correct at the outset, that payments are regular and that changes are dealt with promptly and properly. An adjustment to correct an earlier mistake may put right the problem from the Revenue’s point of view, but as this report shows, the family affected can often pay a heavy price in the disruption of their finances in circumstances where careful budgeting is paramount.
1.14. From the evidence I have seen, I consider the Revenue has yet to adopt a model for dealing with these customers which takes full account both of the complexities of tax credits, and the vulnerabilities of their lives. The relative frequency of contact between customer and the Revenue caused by changing circumstances calls for a more continuous relationship than the one-off transactions which the current system is set up to deal with. When customers speak to the Revenue, particularly when a problem has arisen, they need a single point of reference, where they can talk to someone who can readily access the full case details and their contact history. They need to be able to talk to someone who can take action to deal with their case, rather than being told the matter is in a queue elsewhere, and give a clear timeframe for the resolution of the problem so that they can budget appropriately.
1.15. Where a family’s circumstances have changed several times in the course of a year, the history of an award can be complex. It is therefore reasonable to expect that people are given clear and comprehensive information about their awards. Given the financial burden imposed by a debt owed to the Revenue, it is also reasonable that they be given a full explanation of what they owe, why they owe it, and the rate at which it will be recovered. They also need proactive intervention by the Revenue to ensure that any financial difficulties caused by disruption of a claim or overpayment recovery are minimised. From the evidence I have seen, I am not satisfied that this happens at present.
1.16. The Revenue needs to re-consider how it organises the delivery of tax credits so that it can provide a more immediate, responsive and appropriate service to this new client group, both generally and when things go wrong. It also needs to take on board the lessons from the complaints it has received, in order to adapt its services to the needs of its customers.
1.17. The design of tax credits means that a degree of financial uncertainty is built into all awards (in that awards remain provisional until they can be finalised at the end of the tax year when actual income is known). For families on modest incomes, this uncertainty can be particularly difficult to cope with. That puts an added responsibility on the Revenue to help its customers manage that uncertainty. In practice in the cases I have examined, far from helping customers with this, the manner in which customers have been dealt with by the Revenue has, if anything, contributed to their problems.
1.18. I am particularly concerned that the current system automatically claws back an excess payment in-year or an overpayment assessed at the year-end before any consideration has been given to the full facts of a customer’s case, and any decision made as to whether such payments should in fact be recovered. This represents a fettering of the Revenue’s discretion and is, in my view, unfair to the customer. It means that customers can suffer months of anxiety living in reduced circumstances, paying back a debt which it is eventually determined should not have to be repaid.
1.19. Disputes about the recovery of overpayments at year end and excess payments in-year have been a dominant issue in the cases I have seen. Within the Revenue’s Tax Credits Office (TCO), deciding on whether sums should be recovered (which is based on the extent to which excess payments have been caused by official error, and whether the customers reasonably thought their award was correct) is now a large, staff-intensive operation. I am not convinced that the current test for recovery of excess payments in-year of tax credits properly reflects the weight of obligation there should be on the Revenue to give prompt, accurate and reliable awards to its customers. Nor do I consider that the present internal system for determining whether sums should be repaid operates in a fair and transparent manner. Indeed, the fact that there is no independent appeal right against the Revenue’s decisions on recovery of these sums is undoubtedly one reason why customers come to me, in order to get their case looked at again.
1.20. A wider question arises which is for others to answer. It is whether the degree of financial uncertainty built into the design of tax credits can ever truly work for families on modest means, who have to budget and plan their finances carefully to manage their lives. The sheer scale of the under and overpayment of awards in 2003-04 (see paragraph 1.8) must be a major cause for concern in this context. Arguably, stability and reliability are nearly as important as the actual amount paid. Certainly, in the first two years of tax credits, that stability and reliability has been lacking for many families. The accounts given by affected families in their complaints to me, as set out in the subsequent chapters, demonstrate the harsh realities of the impact that can have. The sums paid out by the Revenue to tax credit recipients in compensation for delay, hardship, inconvenience and distress (see paragraph 6.8) only serve to underline this point.
1.21. This is my first special report on tax credits. It is a subject which I will continue to monitor and to which I will no doubt return. Although Revenue accuracy rates are rising (there have been no repeats of the major computer faults which occurred in 2003-04; and the technical ‘glitches’ which have affected numerous awards may be reducing) given the increasing number of complaints being referred to me, I am not yet convinced that all these problems are in the past.
1.22. The Revenue is now engaged on a new round of finalisation of annual awards, for the 2004-05 tax year. Later in 2005-06, as explained earlier, the Revenue will be taking on a further 800,000 families, transferred from Jobcentre Plus, who are wholly dependent upon Child Tax Credit (plus Child Benefit) for the support of their children. It seems to me, therefore, that it is particularly important that, before that happens, the Revenue reflects carefully on the reality of the difficulties facing a significant number of low income families within the new tax credits system as described in this report, and gives serious thought to the changes required to avoid others having to face similar experiences.
1.23. In December 2004 the Revenue’s National Complaints Conference entitled New Customers, New Concepts, New Opportunities took place. In the keynote speech, the Deputy Chairman emphasised that customer focus was a key priority for the new department; that understanding the customer was central to their objectives; that understanding the customer experience was essential when transforming business processes, and the importance of using complaints as a source of feedback and learning. In the light of that, I very much hope that the Revenue will welcome this report as a helpful learning tool to support them in improving the service they provide.
1.24. For my own part, I intend to continue to scrutinise closely the complaints coming to me to monitor the degree to which the Revenue has absorbed the lessons of the first two years in tailoring its services to the new customers it now serves.
1.25. In drawing on the cases I have investigated, my report identifies a number of different strands in order to examine where problems have arisen and what needs to be done. In reality, in individual cases, different strands were woven together in a complex web - where technical faults, errors, poor communication, lost correspondence, disputed overpayments and backlogs in dealing with complaints and appeals could all be interconnected. In my report, I start at the beginning with the computer problems, technical glitches and errors which particularly dogged the first fifteen months or so of tax credits. These may have now diminished, but they play an important part in explaining the later story. I then examine what I see as the other key problem areas, before I set out my overall conclusions.
Footnotes
4 Annual Report of the Parliamentary Ombudsman 2003-04, HC 702, July 2004, The Stationery Office
5 See House of Commons, Minutes of Evidence, Public Accounts Committee, 24/1/2005, HC 269-i and Hansard, 6/4/2005, col 437 WH 5
6 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.
7 Child and Working Tax Credits Statistics, April 2005, National Statistics 2005
8 Ibid
