Background to tax credits
Jump to
2.1. Child Tax Credit and Working Tax Credit were introduced in April 2003 as part of the Government’s reform agenda for the tax and benefits system. The Government set out its key reasons for delivering financial support through the tax system, rather than the benefits system, in the document The Child and Working Tax Credits : The Modernisation of Britain’s Tax and Benefit System. [9] This presented the key improvements of the new system as being: greater generosity compared to the then benefit sums payable in respect of children; more security on the move into work; and a reduction of stigma. When introducing the new legislation, the Government said that the then existing forms of support were too inflexible; they overlapped and could be an awkward fit with the tax system ‘increasing the hassle of applying for them and creating confusion for claimants’.[10] The new system would be rationalised and streamlined, improving transparency and fairness, and delivering more effective help to families with children and to working households. The aim was to produce a seamless stream of support, which was better targeted and able to adjust to reflect changes as they happened. There are currently around six million households in receipt of one or both of the new tax credits.[11]
Child Tax Credit
2.2. Through Child Tax Credit the Government aimed to create a unified system of income-related support for families with children, both to support families with children in general, and also as a key means of tackling child poverty - by offering the greatest help to those most in need.
2.3. In April 2005 there were around 5.8 million families receiving Child Tax Credit. At the higher income end, this includes two million families with incomes up to around £58,000 who were receiving only the family element of child tax credit (worth £545 per year). At the bottom end, it includes around 2.9 million families with incomes below a threshold (currently £13,910) receiving significant financial help through maximum Child Tax Credit.[12] Maximum Child Tax Credit is currently worth at least £1,690 per child per year, with higher amounts being paid for a first child, a baby up to 12 months, or a child with a disability. Box A explains the main elements of Child Tax Credit, including amounts paid, in more detail.
Families on Income Support and income-related Jobseeker’s Allowance
2.4. With Child Tax Credits, the Revenue has a new role in distributing financial support to non-working families on benefits - for whom it forms a significant part of their income. There are around 1.4 million families out of work who are dependent on Child Tax Credit (together with Child Benefit) to support their children.[13] Families in receipt of Income Support and income-related Jobseeker’s Allowance (JSA) automatically receive maximum Child Tax Credit, which has replaced the children’s allowances previously paid with those benefits. Since April 2003, all new Income Support and income-related JSA claimants have been paid their Child Tax Credits via the Revenue.
2.5. Families who were already receiving Income Support and Jobseeker’s Allowance when Child Tax Credit was introduced have continued to be paid for their children via Jobcentre Plus. There are currently around 800,000 families in this position. The intention is to ‘migrate’ these families over to the Revenue’s tax credits IT systems during 2005-06, once the Revenue is confident that the transition can happen smoothly without disruption in payment.
Working Tax Credit
2.6. Working Tax Credit offers financial support to low income earners, including assistance with the costs of registered childcare. It is designed to encourage more people into employment by ‘making work pay’. In the current year, low paid workers earning up to £5,220 per year receive maximum entitlement. Working Tax Credit replaced the ‘adult’ element of the previous Working Families Tax Credit, and was expanded to also include low paid single earners, as well as adults with children. There are currently around 1.8 million Working Tax Credit recipients, 1.5 million of whom are families also receiving Child Tax Credit.[14] Box B explains the main elements of Working Tax Credit in more detail.
A system of annual awards
2.7. The new tax credits were designed to bring about a greater integration between the tax and benefits systems. Administered by the Revenue, a key feature is that awards, like tax, are calculated on an annual assessment of income (and use similar definitions of income). Based, at the start of the tax year, on a household’s current circumstances and the previous tax year’s income, awards are not finalised until the end of the tax year, when actual income during the year and any relevant changes of circumstance are considered and under- or overpayments of tax credits in the year identified. Effectively, during the course of a year, awards are provisional until the final reconciliation at year-end. Underpayments are then reimbursed and any overpayment is recovered - usually by reducing the subsequent award in the following tax year (see below).
The responsiveness of the system
2.8. During the course of the year, tax credit recipients are obliged to report certain changes of circumstance within three months. For example, it must be reported if a couple split up or a lone parent re-partners, for this will bring the existing award to an end. The ending of childcare arrangements or a significant drop in childcare costs must also be reported.
2.9. Families are also encouraged to report other changes which will affect the amount of an award, to reduce the scope for under- and overpayment at the end of the year. A new baby, a drop in income, or the award of a disability benefit might all lead to an increase in an award. A rise in family income, a drop in working hours below the 30 hour threshold, or a child aged 16 leaving school could all lead to a reduction in an award. In order to give some protection against financial instability during the year, any income rise up to £2,500 per year is ignored. It is only when annual income rises above this level that the award for the year will be reduced.
2.10. Where changes are reported, the Revenue makes an ‘in-year adjustment’, either raising or lowering the award to reflect the revised circumstances. A change resulting in an increase in tax credits will be backdated to the date of change, up to a maximum of three months. Any resultant underpayment will then be paid. By contrast, a change leading to a reduced award is not subject to any limitation and will be backdated to the date the change took effect. Any resultant excess tax credits paid in the year to date will be recovered by adjusting the remaining award for the rest of the year. Excess tax credits may be the result, for example, of a delay in reporting a change of circumstances or because the previous award was wrong for various reasons. But, however scrupulous a person is in reporting changes in their circumstances, excess tax credits can also be simply the result of a rise in income above £2,500 which - by virtue of the annual system - causes earlier payments made, although accurate at the time, to be excessive. This can happen, for example, when a partner goes back to work in a family where there had previously only been one earner.
Recovery of overpayments and excess payments in-year
2.11. The design of tax credits makes a distinction between two different situations where customers are paid too much in tax credits. ‘Overpayments’ are when the final reckoning of tax credits paid in the previous tax year is carried out and tax credits are found to have been overpaid; tax credits overpaid in the current tax year - which are seen simply as the result of adjustments (which may occur more than once) to ensure that the award for the year as a whole remains correct and any likely overpayment minimised by the end of the tax year, are described as ‘excess’ payments.
2.12. In the case of overpayments at year-end, the Revenue will seek to recover the excess paid. The preferred approach is to reduce the subsequent award of tax credits by amounts broadly linked to family income. See Chapter 5 for further information.
2.13. Within the design of tax credits, the recovery of excess payments in-year is merely part of a rolling mathematical re-calculation of an award by the tax credits computer to ensure its accuracy at year-end. In practical terms, as this report shows, 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 the year-end. In these circumstances, the re-adjustment of an award can lead to a drastic drop in payment, or cessation altogether.
2.14. The Revenue has therefore introduced discretionary ‘Additional Tax Credits (ATCs)’, which can be paid, upon request, on grounds of hardship or where there are reasons to think that a possible overpayment should not be recovered. These discretionary payments are themselves recoverable starting in the following year. Paid by girocheque, ATCs supplement a tax credits award (which means that, in effect, they reduce the rate of recovery of the excess amount owed during the rest of the year). See Chapter 5 for further information.
2.15. The Revenue has discretion whether or not to recover overpaid tax credits at all. The application of this discretion is codified in the Revenue’s Code of Practice 26 (COP 26) What happens if we have paid you too much tax credits? which was published in December 2003. Under the Code, the Revenue will not recover an overpayment caused by ‘official error’ - provided it was reasonable for the customer to think an award was correct. ‘Official error’ includes the situation where the Revenue was notified of a change of circumstances but failed to act upon it with a reasonable time (30 working days). The Code also provides for recovery to be waived, in whole or in part, on grounds of hardship. However, in practice, waiving recovery is not considered unless the customer requests it. This is discussed further in Chapter 5.
The administration and payment of tax credits
2.16. Applicants for tax credits claim on a single claim form for both Child and Working Tax Credits, and entitlement is calculated together. The processing of tax credits claims is wholly IT based. Most tax credits claims are now captured electronically either on the tax credit computer using rapid data capture techniques or via the Internet. 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. The IT systems which underpin tax credits are the main repository for all information on a tax credits claim - whoever is dealing with a particular issue, and wherever they are.
2.17. There are currently around 8,000 staff within the Revenue working on tax credits. The TCO, with offices in Preston and Liverpool, has the main responsibility for administration and payment. Within the TCO are a number of teams handling different aspects of tax credits, including overpayments, complaints, appeals, and manual payments. A ‘resolution team’ has the task of dealing with cases where particular technical problems have arisen and establishing solutions. They are backed by a Business Service Team which liaises with the Revenue’s IT suppliers.
2.18. For the majority of customers, the ‘front desk’ of tax credits is the Tax Credits Helpline. This is operated by a separate part of the Revenue - the Inland Revenue Contact Centre network (IRCC). There are currently six call centres dealing with routine tax credit calls, and a seventh based in Liverpool which acts as a referral facility for the other call centres in dealing with more complex cases. Helpline operators handle the routine inputting of data on to the tax credit computer to update customers’ awards.
Appendix B sets out in more detail the organisational structure behind the administration.
Box A
Child Tax Credit
Available to those aged 16 or over ordinarily resident and present in the UK, whether working or not, and who are responsible for at least one child.
Normally paid directly into the bank of the main carer. There are several different elements which can be included in an award:
2003-04 Annual Rates | 2004-05 Annual Rates | 2005-06 Annual Rates | |
| Family element (one per family) | £545 | £545 | £545 |
| Higher family element (in first year of child’s life) | £545 | £545 | £545 |
| Child element (for each child) | £1,445 | £1,625 | £1,690 |
| Disability element (for each disabled child) | £2,155 | £2,215 | £2,285 |
| Severe disability element (for each severely disabled child) | £865 | £890 | £920 |
The family element is reduced by 6.67p for every £1 of income over £50,000 in most cases.
For families entitled to only Child Tax Credit, the Child Element is reduced by 37p for every £1 of income over a limit of £13,910 (£13,480 in 2004-05 and £13,230 in 2003-04). For families entitled to both Child Tax Credit and Working Tax Credit, the child element is withdrawn at that rate after Working Tax Credit has been fully withdrawn.
Source: National Audit Office (2005-06 figures added)
Box B
Working Tax Credit
Available to people aged 16 and over, working at least 16 hours per week with dependent children or a disability or, for those without children or a disability, aged 25 and over and working at least 30 hours a week.
Paid via the employer if the claimant is an employee, otherwise paid direct to claimants such as the self-employed. The childcare element is paid direct to the main carer.
2003-04 Annual Rates | 2004-05 Annual Rates | 2005-06 Annual Rates | |
| Basic element | £1,525 | £1,570 | £1,620 |
| Second adult and lone parent element | £1,500 | £1,545 | £1,595 |
| 30 hour element | £620 | £640 | £660 |
| Disabled worker element | £2,040 | £2.100 | £2,165 |
| Severe disability element | £865 | £890 | £920 |
| Elements for claimants aged 50 and above, working 16-29 hours | £1,045 | £1,075 | £1,110 |
| Elements for claimants aged 50 and above, working 30+ hours | £1,565 | £1,610 | £1,660 |
| Childcare element - childcare (costs cannot exceed £175* per week for one child and £300* per week for two or more children) | 70% of costs | 70% of costs | 70% of costs |
*In 2003-04 and 2004-05 these figures were £135 and £200 per week
A claim is reduced by 37p for every £1 of annual income over a limit of £5,060 (£5,060 in 2004-05 and 2003-04)
Source: National Audit Office (2005-06 figures added)
Footnotes
9 The Child and Working Tax Credits: the Modernisation of Britain’s Tax and Welfare System Number Ten, HM Treasury and Inland Revenue, April 2002
10 Hansard 10/12/01 column 596
11 Child and Working Tax Credits Statistics, April 2005, National Statistics 2005
12 Ibid
13 Ibid
14 Child and Working Tax Credits Statistics, April 2005, National Statistics 2005
