Overpayments

5.1. Although excess tax credits payments and their recovery are an in-built element of new tax credits (see paragraph 2.11), it was always likely that there would be a large number of overpayments during the first year or so of tax credits as the new system bedded down. This was because customers were unfamiliar with a system of annual awards and the need to report relevant changes of circumstances. There was also the fact that, in 2003-04, initial awards were based on annual income in 2001-02. Unless customers alerted the Revenue to their current income, the likelihood was that, at the end of the tax year when their award was reassessed and actual income in 2003-04 taken into account, they would have been paid too much. People were also able to make their applications for new tax credits several months in advance, which meant that, by the time an award was made in April 2003, their circumstances, for example their employment or their family situation, could have changed. It was also only to be anticipated that, with new rules, new staff, and a new IT system, unfamiliarity on the part of the operators might lead to errors.

5.2. Recently published figures on overpayments at the end of the first year of tax credits 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.^[32] It should be emphasised that these figures are in respect of overpayments as reckoned at year-end. They do not show the number of awards adjusted in-year to take account of excess tax credits paid during the year, where reductions in the later award were sufficient to ensure that the excess payment had been fully paid back by the end of the tax year.

5.3. Apart from the sheer number of households affected by overpayments, a variety of factors have led to this aspect of the new system becoming a major source of complaint to the Ombudsman. First, although this situation was foreseeable, and the Revenue should, therefore, have been able to anticipate and plan for it, the Revenue appears to have been caught unprepared for the volume of overpayments and the customer response to them. Secondly, the manner in which recovery of excess payments has been handled has alienated many people and caused considerable financial disruption and real hardship. Thirdly, large backlogs have built up in dealing with requests for reconsideration of recovery. Fourthly, from the evidence we have seen, in a large proportion of cases the Revenue itself has been at fault in causing an excess payment to occur, yet has insisted on repayment.

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Procedures for recovery of excess tax credit payments

5.4. As indicated above, the manner in which excess tax credits payments have been recovered has proved contentious - even in cases where the cause of the excess payment owes nothing to official error, but rather is due to a delay on the part of the customer in reporting a change of circumstance, wrong information provided by the customer to the Revenue, or simply a rise in annual income of more than £2,500.

5.5. There is no statutory test to decide whether or not an excess payment of tax credits - either in-year or at the end of the year - may be recovered. Under the Tax Credits Act 2002, decisions concerning the recovery of overpayments at year-end and the adjustment of tax credits awards in-year to avoid likely overpayments are decisions which fall within the discretion of the Revenue. However, good administration requires the Revenue, when considering the exercise of their discretion in this area, to do so in accordance with procedures that are fair, and which take account of all material circumstances.

5.6. It is matter of significant concern that, despite the likelihood of higher numbers of excess payments during the first year of tax credits (even discounting the unanticipated problems arising from the new IT systems), there were no procedures in place from the introduction of the new tax credits system in April 2003 to make clear either to Revenue staff or customers the basis on which that discretion would be exercised, or the relevant circumstances which needed to be considered.

5.7. By Autumn 2003 it was apparent that tens of thousands of customers had been overpaid as a result of system problems, the use of manual payments (resulting in later duplicate payments) and early staff errors. But at that point the procedures were not fully in place to determine and then explain to people how excess payments would be recovered, and the circumstances in which recovery could be waived.

5.8. ATCs (see paragraph 2.14), also known as ‘top-up’ or ‘hardship’ payments, were only introduced in October/November 2003 in response to the then recognised difficulties facing some customers. It was not until December 2003, eight months after the new tax credits system was introduced, that COP 26 entitled What happens if we have paid you too much tax credit? was published. It took until February 2004, nearly a year after the launch of the scheme, for a flyer to be issued with every amended award notice, alerting customers to the possibility of the payment of ATCs if a reduction in an award was causing hardship, and drawing their attention to the COP 26. Furthermore, full guidance on how to apply the Code was not available to staff until May 2004. It was also only at this point that a dedicated team was established within the Revenue to consider claims to waive recovery of an overpayment on the grounds of official error, and standardised procedures established to handle applications in a consistent manner.

5.9. These delays meant that a considerable number of customers, who knew they had been overpaid, were left anxious and uncertain about the debt they might owe, and the arrangements to repay it. Others were wrongly reassured that an overpayment would not be recovered until the following year.

5.10. During this early period, it is clear that a considerable number of people who wished to challenge repayment were wrongly led to believe by Helpline staff that the correct course of action was to pursue an appeal. In fact, there is no right of appeal against overpayment decisions. This led to delay, and false expectations that the matter was being dealt with, before customers were eventually notified that there was no right of appeal.

5.11. In short, the Revenue was late in putting in place procedures and adequately trained staff to handle the issues arising from the recovery of excess tax credits payments. And it was slow in effectively communicating with its customers so that they properly understood the recovery process and how they might challenge it.

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Code of Practice 26: ‘What happens if we have paid you too much tax credit?’

5.12. COP 26 was first published in December 2003. A revised and expanded version was published in August 2004. COP 26 gives a full explanation of the Revenue’s policy when customers have received too much in tax credits, including details of:

• how tax credits are worked out, including the system for adjusting awards during the year to take account of changes to circumstances to avoid paying too much by the year-end;
• the circumstances in which ATCs will be made on request, to mitigate the effects of the in-year reduction or cessation of an award to recover excess tax credits. Such payments are made on grounds of hardship, or if there are grounds why the excess paid should not be recovered (see below). The guidance was amplified and expanded in the revised Code issued in August 2004, to spell out the amounts that would be paid and the circumstances when ATCs would not be made.  
  • For families on Income Support or Jobseeker’s Allowance, ATCs increase their tax credits to 90% of the amount due - so that they are paying only 10 % towards the amount owed for the rest of the year.
  • Where a family are receiving maximum Working Tax Credit, or maximum Child Tax credit, the award of ATCs means that they pay 25% of their remaining award towards the amount they owe.
  • Other families receiving ATCs effectively have their award supplemented so that they pay 50% of the tax credits due towards the excess payments of their tax credits owed.

ATCs will not be paid to someone awarded only the family element of Child Tax Credit, or where an award has been reduced because of an income rise of at least £2,500.

• the system of finalisation of awards at the end of the year when actual overpayments are identified;
• the maximum amounts by which a customer’s award will be reduced to recover an overpayment from the previous year. Unlike excess payments in year, the rates of recovery are linked to family income. There are three rates of recovery: 
  • 10% for families on lowest incomes receiving a maximum award;
  • 100% for families on the highest incomes - those receiving only the family element of Child Tax Credit;
  • and 25% for everyone else.

Where reduction from a future award is not possible, the Revenue will request payment directly.

• the circumstances in which the Revenue can decide not to recover all or part of an overpayment due to official error, namely that the overpayment was made because of a mistake by the Revenue, and either it was reasonable for the customer to think the award was correct, or the customer notified the Revenue of the overpayment and no action was taken within 30 working days. The Code also allows for recovery to be waived, either wholly or partly, on grounds of hardship.

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The automatic recovery of excess payments and overpayments of tax credits

5.13. There are two main problems with the current system of recovery of both types of overpayment. The first is that it is instigated without any prior consideration by the Revenue of whether or not the sum in question is recoverable in accordance with COP 26. The second, considered below, is that, in the case of recovery of excess payments in-year, it is done automatically without regard to customers’ financial circumstances and whether they can afford the recovery rate imposed.

5.14. COP 26 states: ‘We will not ask you to pay back an overpayment if it arose because we made a mistake and you could reasonably have thought your award was right.’ Yet in practice, and in contradiction of the Code, excess payments during the tax year (and at the end of the tax year) are recovered by the Revenue as a matter of course, without prior investigation of either of these two key questions.

5.15. It is left to the customer, after recovery has begun, to ask the Revenue to apply its own Code. The onus is placed on the customer to raise the question of Revenue mistake, and to address the Revenue on the reasons why they reasonably thought their award was correct. Whilst the Revenue considers the matter - a process currently taking several months - recovery continues.

5.16. Richard Drabble QC, an expert in public law, has argued that the Revenue’s current practice of automatic recovery of all overpayments, before addressing its own test for recovery as set out in COP 26, is unlawful.^[33] The Revenue advised us in April 2005 that it was still awaiting its own definitive legal advice on this matter. We consider it essential that the Revenue obtain its own legal advice on the lawfulness of its current practice as soon as possible.

5.17. Whatever the legal position, our view is that a fundamental unfairness arises where recovery of an overpayment takes place to the detriment of a customer before COP 26 has been considered. Effectively, the Revenue has fettered its own discretion by making an initial determination to commence recovery action, before it has considered the full facts of the case. That is maladministration. Unless customers are alerted to the existence of the provisions of COP 26 and then take steps to request that the Revenue apply its Code, they may end up wrongly paying back tax credits which should not, in fact, be recoverable.

I therefore recommend that 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 COP 26.

5.18. In his opinion, Mr Drabble suggested there might be an argument that, given the administrative complexities of tax credits, the requirements of procedural fairness could be met if the Revenue ensured that, at the time the initial decision to recover the overpayment was taken, customers clearly understood the circumstances when recovery would be waived. Certainly, we take the view that, whilst the Revenue considers the Ombudsman’s recommendation above, it is very important that it has in place procedures, at the point when recovery is about to be instigated, which ensure that all customers know the circumstances in which the Revenue will consider waiving recovery, so that they can make informed representations. For it is only after the customer’s position has been fully taken into account, that the provisions of the Code can be properly applied.

5.19. Unfortunately, at present, the information given to customers alerting them to the circumstances when recovery will not be sought is fairly limited, particularly for those with excess tax credit payments in-year. No mention is made of the provisions of COP 26, and in particular the circumstances when recovery will be waived, on an award notice. The notice alerts customers to their right of appeal; but in fact, the procedures for disputing recovery are different. The guidance notes which accompany an award notice state:

‘If you were paid too much tax credit, if we can, we will collect the amount you owe from your current tax credit award. If you no longer have an award, you can pay us back over 12 months. For further information, please see our Code of Practice What happens if we have paid you too much tax credit?’’

5.20. Owing sums of money - sometimes hundreds or thousands of pounds - to the Revenue is a very serious matter, particularly for families whose finances may already be limited. It is important that they are given every opportunity to understand the circumstances in which that debt may be waived, and how they can make representations on the matter.

5.21. It is deeply unsatisfactory that an award notice, whilst alerting customers to their right of appeal, says nothing on the face of it concerning procedures to challenge recovery of an overpayment of tax credits, whether in-year or at the end of the year, and the circumstances when this will be considered. The fact that the Revenue automatically institutes recovery procedures before consideration of whether the Code applies makes it a requirement of basic fairness that customers must be given the best opportunity to make representations on how the Code applies in their case. Accompanying guidance notes are helpful, but do not go far enough.

I therefore recommend that, as a minimum, on the ‘payments page’ of an award notice, customers are 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. The alert 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.

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Recovery of excess payments in-year: the financial impact

5.22. The in-year recovery of excess tax credits payments is intended to ensure that the full amount of any likely overpayment is recovered by the end of the tax year. The automated system which calculates and adjusts tax credit awards has therefore been designed to reduce a customer’s future payments, or stop payment altogether, in order to achieve this effect. Unlike the recovery of overpayments determined at year-end, recovery rates are not linked to a family’s income. There is no limit on the amount by which weekly or monthly payments can be reduced. Although a key part of the tax credits design, for many thousands of people reliant on tax credits as a crucial element of their household budgets, the effect has been severe.

5.23. Although, starting in Autumn 2003, as has already been explained, the Revenue introduced discretionary ATCs to mitigate the harsh effects of in-year recovery, such payments have to be applied for after tax credits have already been reduced. The responsibility is put on customers to identify themselves as eligible and to come forward to claim.

5.24. Below are a small number of the accounts the Ombudsman has received from families affected by the in-year recovery of excess tax credit payments:

5.25. Particularly hard hit have been families in receipt of Income Support or Jobseeker’s Allowance, where in-year reduction of a Child Tax Credit award to recover a previous excess payment of tax credits can leave them struggling below subsistence level income. For example, in one case investigated, a lone parent on Income Support found her Child Tax Credit reduced to just £17 a week from September 2003 to January 2004. Although she called the Tax Credits Helpline on repeated occasions, explaining that she was in receipt of Income Support, it was only after the intervention of the local CAB that in January 2004 the Revenue began to pay her ATCs of £75.41 per week, backdated to the previous year.

5.26. The sudden dramatic drop in an award has caused grave problems for families who have childcare costs to pay, threatening the ability of parents to continue working. One woman (who, four months previously, had repaid a large overpayment caused by official error) wrote in December 2004:

‘I received a tax credit award notice dated 14th October [2004] stating that my payments were to drop dramatically from over £400 per month to £162 per month… I have written to them several times, faxed and tried phoning to say we cannot survive with this reduction, yet we do not hear anything back except they will aim to reply in 6-8 weeks. This is extremely upsetting as we are struggling now, and although I have faxed them on two occasions informing them of this, no effort to help us has been made. At present we are paying £528 every four weeks for childminding, and I cannot see how I can keep this up with the reduced tax credits we are receiving, and at present I can see no alternative but to have to give up work…

I feel it is appalling that they are able to leave people with considerable financial problems, forcing them into debt, without even discussing it… I cannot believe that we have been left like this with no money and nowhere to turn right before Christmas. I have been unable to sleep and have been very anxious about this situation… ’

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ATCs

5.27. COP 26 makes clear that the onus to apply for ATCs lies with the customer. It says: ‘You need to ask us if you want us to review your payments.’ The difficulty, seen in a good proportion of the cases investigated by the Ombudsman, is that customers badly affected by the cut in their income, have only belatedly found out about ATCs, if at all. Therefore they have not specifically asked for them. In 2004-05 ATCs had been paid in only around 7,000 cases up until the end of February 2005.^[34]

5.28. Customer information about ATCs is sparse. Customers are not automatically sent COP 26. No information about ATCs is given on an award notice. In the 17 pages of guidance notes which accompany an award notice, there is one sentence which appears in a paragraph headed ‘If your award has gone down’ on page 12 of the notes. The sentence says ‘If your payments are reduced to a level that causes financial hardship, please contact us.’ It is perhaps unsurprising that customers do not always spot this sentence, or appreciate its significance. Nor, as has been admitted in a number of the cases investigated by the Ombudsman, has the Revenue always responded to a customer’s complaints about the reductions in their awards by alerting them promptly to the help available through ATCs.

5.29. The Ombudsman takes the view that, in a scheme aimed at giving financial support to families on low and modest incomes, a system of recovery of excess payments can only be a fair one if it takes account of ability to pay - whatever the time of year. Leaving it to families in hardship to make the case for ATCs will always lead to some families losing out.

I therefore recommend that in cases where it is determined 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 (see paragraph 5.12).

5.30. As a minimum, given the grave consequences for families affected by reductions in their tax credits, the Revenue must be more pro-active in ensuring that its customers are paid ATCs if experiencing hardship.

We therefore recommend that steps are taken to ensure that all Revenue staff who have contact with tax credit customers are alert to the circumstances when ATCs might be appropriate, so that they can invite an immediate claim.

By definition, families in receipt of Income Support or income-based Jobseeker’s Allowance will suffer hardship if their Child Tax Credit is reduced to recover an in-year overpayment.

I therefore recommend that, where in-year recovery of excess tax credits is justified, the Revenue takes steps to pay ATC automatically to families in receipt of Income Support and income-based Jobseeker’s Allowance.

More needs to be done to give prominence to the availability of ATCs in the printed information given to customers.

I therefore recommend that details of the availability of ATCs is printed prominently on the ‘payment’ 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.

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Information about an excess payment of tax credits

5.31. For most tax credit recipients on modest incomes and tight household budgets, the news that they have been paid too much in tax credit and therefore owe money to the Revenue is deeply worrying. Not unnaturally they want to check the details - even if they accept that they have received too much in tax credits. In some cases, although informed that they have received too much tax credits, customers are confused and uncertain about the reasons. There may have been a past history of changing circumstances, or acknowledged delay/error by either customer or Revenue or both, which means that the customer has good reason to want carefully to scrutinise the Revenue’s explanation and figures. In some cases, successive notices have given conflicting figures regarding the amount overpaid. Yet in practice, people can find themselves having to spend considerable time and energy contacting the Revenue, simply in order to establish exactly how much they owe, exactly why they owe it, and what the rate of repayment is.

5.32. In the case of recovery during the year, receipt of a revised award notice is often the first notification a customer has that excess tax credits have been paid and are being recovered. Yet the notice does not - on the face of it - identify the particular reasons why the award has been revised and the notice issued. Without additional information, the award - and the excess payment - cannot be understood.

5.33. Appendix D gives an example of the payments page of a revised award notice given in 2004-05, and the information contained in the guidance notes which accompany an award notice intended to explain it. The example notice gives details of tax credits payments due for the remainder of 2004-05, taking account of payments made in the year to date, an overpayment in 2003-04 and in-year recovery of excess payments made in 2004-05. Without the detailed explanatory guide from the Revenue, it is hard to identify simple details, such as exactly how much is owed; what amount is being recovered in the current year; and what the rate of recovery is. To a non-expert, the figures - given in two columns relating to Child Tax Credit and Working Tax Credit - do not seem logically to relate to each other. Based on the information provided, it is not possible to follow the calculation. The notice does not explain the reasons which led to amounts being owed to the Revenue.

5.34. For the new tax year 2005-06, the award notice has been slightly altered in an effort to make it more intelligible (so that the sequence of figures - using the codes in the explanatory note - have been altered to now read A,C,D,B and E). It still remains a challenging document.

5.35. Telephone calls to the Tax Credits Helpline for more information are not always successful. As the cases highlighted in this report show, a Helpline adviser, looking at the customer’s details on the system for the first time, is not always in a position fully to explain the different events which may have cumulatively led to the excess payment or an overpayment. In theory, if a customer finds the Helpline’s explanation insufficient, the operator can arrange for the TCO’s Overpayments Team to write to the customer with a more detailed explanation. In practice, the cases seen by the Ombudsman suggest that some people, unable to get a full explanation from the Helpline, seek to appeal or launch a request for reconsideration of the decision to recover the excess payment.

5.36. At the award finalisation stage at the year-end, the Revenue will notify the customer of any overpayment which has occurred in the year’s award as a whole. In 2004, the Revenue took steps to inform customers who had been overpaid as a result of the computer problems (discussed in Chapter 3) that a mistake had occurred. The standard letters issued notifying customers of the amount owed also included an apology, a copy of COP 26, and a telephone number to call ‘if you think you had good reason to believe that your payments were correct.’ This was good practice.

5.37. However, the letters were less than explicit about the cause of the mistake or when it had occurred. For example, couples who were overpaid as a result of the computer changing one partner’s income to zero, and who were identified in 2004 at the finalisation stage of their first year’s award, received a letter which said:

‘I am writing to let you know that your tax credits have been overpaid during 2003-04 and 2004-05 because we calculated your award incorrectly, to apologise for our mistake and to explain the arrangements for repaying this money’.

Missing from the letter was any explanation of what mistake had been made by the Revenue and when the mistake had occurred. This made it difficult for customers to understand what had happened, and to make representations as to why it had been reasonable for them at the time to consider their award was correct. One customer complained that that he had tried for three weeks to get through to the special telephone number given on the letter without success.

5.38. Customers who had been paid sums directly into their accounts without any notice being sent received a letter which began:

‘I am writing to tell you that your tax credits payments for 2003-04 included [£amount] which was paid in error. As this amount was substantial, we believe you could be expected to have realised that your payments did not match the information in your award notice. We are therefore asking you to repay this money… ’

The letter did not explain when the amount had been paid, or the fact that the cause had been a computer error. In one case dealt with by the Ombudsman, the customer mistakenly thought the error had arisen because she had been in frequent contact with the Revenue to report changes in her employment and earnings, and had ended up having repeatedly to correct a series of mistakes it had made when updating her award. She therefore made long representations on this point, explaining how hard she had tried to keep the Revenue informed. In making representations concerning whether it was reasonable for the customer to believe their award was correct, it is often important to examine the surrounding circumstances at the date when the erroneous payment was made. The date is therefore very important if the customer is going to be able to properly put their case.

5.39. Given the considerable sums which people are required to repay, they have a right to expect clear and explicit notifications as a matter of course, enabling them to ascertain the total amount they owe; how the overpayment or excess payment in-year has arisen; and the repayment arrangements. This does not happen at present.

5.40. Better information to customers when they have been paid too much tax credits would lessen the pressure of work on the Revenue. It would mean fewer calls to the Helpline, fewer misguided appeals, and more focused representations to the TCO overpayments team, leading to better decisions first time round.

5.41. The extensive revisions to award notices from April 2006 (discussed in Chapter 4) will go some way to improving the situation. However, customers deserve more direct and explicit information referring solely to their debt to the Revenue and its recovery.

I therefore recommend that customers who have been paid too much in tax credits, whether identified during the year or at year-end, are 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.

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Delays in dealing with disputed overpayments

5.42. The delays in dealing with disputed overpayments have been considerable. By the end of March 2005 some 214,000 requests for reconsideration of recovery had been recorded. As at 30 April 2005, less than half (89,000 or 41.5%) had been dealt with. Around 125,000 disputed overpayments cases were still awaiting a decision.^[35] Between June 2004 and April 2005 the Revenue more than quadrupled the number of staff dealing with disputed overpayments from 105 full-time staff to 495 as at 30 April 2005. However, Revenue staff advised us in April 2005 that the then current rate of receipt of new cases was greater than the rate at which cases were being cleared, even by the large team deployed on this work.

5.43. In cases which reach the Ombudsman, it is not unusual for customers to have already been waiting for between four and six months for their cases to be looked at by the disputed overpayments team at the TCO. In some cases the delays have been longer, because people have sought to appeal against the decision to recover, and their cases have awaited action within the Revenue to deal with the appeal before being correctly referred, some time later, to the disputed overpayments team. In other instances, customers have written long letters requesting that recovery be reconsidered and explaining their reasons, only to be a sent a letter weeks later asking them to repeat the same information on a standard form (Form TC 846). Unfortunately, on some occasions, once returned, these standard forms have gone missing.

5.44. Delays matter. Given that in the majority of disputed overpayment cases the Revenue has already commenced recovery action, the fairness of the provisions of COP 26 is fatally undermined if cases are not dealt with swiftly. People’s sense of frustration at the reduction in their tax credits is only increased if they know - maybe with good reason - that the overpayment in question was not their fault, or, indeed, may itself be a mistake. The long delays in investigating dispute overpayment cases, have meant that, where the Revenue has finally agreed to remit an overpayment, the families in question have already paid back a substantial amount - whilst unnecessarily living for months on reduced tax credit.

5.45. Coupled with the pressure of trying to make ends meet on a reduced income for extended periods, has been the added frustration of having to repeatedly contact the Helpline to find out what is happening. The delays have impacted on already stressed lives. One customer was attempting to juggle calls to the Revenue from hospital, where her son was severely ill. She wrote:

‘I have sent in a request to reconsider recovery of [overpaid] tax credit in May 04. This apparently has disappeared. I have sent another one by recorded delivery, which was received on 23 June 04 at 8.03am, but no-one knows where this one is either… I have rung 26 times since 1 June 04 to ask for the overpayments team to ring me back. Each time an e-mail request has been sent by the Helpline, and yet still no-one rings me back. According to the system my request to reconsider recovery of an overpayment has not been dealt with. I want to know what is going on… ’

She told her MP:

‘… it’s hard to push [the Revenue] from the hospital and get them to return calls when some days my phone has to be switched off when we’re at [the hospital].’

5.46. In an effort to clear the backlogs, the Revenue has introduced new streamlined procedures, effective from April 2005, as a temporary measure to deal with cases still in the queue relating to 2003-04 end-of-year overpayments, and 2004-05 in-year adjustments. The purpose is to clear the existing backlog of cases by the end of the summer. The new arrangements will not apply to new overpayments discovered in the course of the next round of finalisation of awards for 2004-05.

5.47. Under the new streamlined procedures, an initial determination of whether or not to remit an overpayment will be considered on the basis of both the size of the overpayment and the number of versions of the award there have been. At first instance, there will be no detailed investigation of individual circumstances, except in cases of larger overpayments. More detailed reconsideration will follow where a customer challenges the initial decision or supplies new evidence. The new streamlined procedures are intended to be quicker, in that they remove a lot of the judgement from the decisions, and will be more generous to customers in the sense of giving relief to more people and giving more relief on average than under the existing, detailed procedures.

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Official error: consideration of remittance

5.48. There is currently no information available on the causes of overpayments, and hence the number of cases where too much in tax credits has been paid due to Revenue mistake. The Revenue’s own figures seeking to quantify the overpayments relating to various identified IT system problems point to some 176,000 families facing possible recovery action as a consequence (excluding those cases where overpayments have been written off as a matter of policy).^[36] Added to this figure are the families whose claims have been affected by the range of technical problems which have occurred when processing individual cases through the system; those overpaid as a result of the lack of reconciliation between manual and computer-generated payments; and cases affected by staff error.

5.49. At this stage, a very conservative estimate would be that there are likely to have been at least 250,000 families who have been paid too much in tax credit and are subject to recovery action, as a result of the variety of technical problems, errors and omissions on the part of the Revenue.

5.50. By the end of February 2005, of the 68,500 requests for reconsideration of overpayment recovery which had been decided at that date, only 15% (15.3%) had been successful in getting an overpayment written off.^[37]

5.51. To apply successfully for remittance of an overpayment, it must first be established that the overpayment has been caused by a mistake or omission by the Revenue. As a matter of principle, where the Revenue becomes aware that a mistake has occurred which has led to too much tax credit being paid, it is reasonable to expect that they should notify the customer and draw their attention to COP 26. This happened, for example, during the 2003-04 finalisation process, when letters acknowledging that a mistake had been made were sent to customers affected by two early major computer processing faults.

I therefore recommend that whenever a Revenue mistake or error is identified which has led to too much in tax credits being paid, the customer is immediately notified of exactly what has happened and informed of the circumstances when recovery can be waived.

5.52. In some cases a customer already knows a Revenue mistake has occurred, or the Revenue can recognise it fairly easily. In other cases, the cause of the overpayment - and the extent to which the Revenue was at fault - is uncertain. Some of the cases coming to the Ombudsman have a long and complex history preceding notice of an excess payment in-year or an overpayment - where disentangling what went wrong and when (and who was responsible) is a difficult and painstaking task. The very process of investigation can uncover mistakes and errors, of which the customer could not possibly have been aware, and which the Revenue itself may not have realised.

5.53. COP 26 makes clear that, even where an excess payment has occurred due to a mistake on the part of the Revenue, it will require the money to be repaid unless the customer can show it was reasonable to think the award was correct. As can be seen from the low success rate in getting overpayments remitted, in dealing with cases up until April 2005 the Revenue took a robust line on the question of ‘reasonable belief’. It has argued that there is a principle of individual customer responsibility involved. Thus, in a Parliamentary debate on tax credits in April 2005, the then Economic Secretary to the Treasury, John Healey, argued: ‘people need to take responsibility for checking their tax credit awards, just as they should check their PAYE code, and they should let the Revenue know if anything is wrong.’^[38]

5.54. From the evidence seen by the Ombudsman, most people understood their responsibilities to give correct information to the Revenue and to update that information if their circumstances changed. But there was an assumption on the part of many customers that, once they had provided all relevant information, the Revenue would properly determine their claim and make payment. Tax credits customers trusted the Revenue to get it right. Many were simply unaware of the degree to which there was a high risk of Revenue mistake or technical error. It is clear, for example, that not everyone appreciated the extent to which failure carefully to scrutinise an award notice could lead to an Revenue error going unnoticed - a problem exacerbated by the poor quality of award notices (which in some cases simply did not give sufficient information for a mistake to be spotted), and the fact that people could find themselves receiving a succession of award notices within a short period of time, for reasons which were not always clear. As one customer (a victim of the processing error which led to her partner’s income being deleted), commented:

‘Everyone believes what the Revenue say, you don’t question it and this was a new thing… the general public believe that people who work in government offices are people who can do their jobs properly. So I hope you can understand why I didn’t question anything.’

5.55. A question arises about the quality of initial decisions by the Revenue, when people first request reconsideration of recovery of an overpayment. The Revenue has told us that its own Internal Audit Office recently carried out a review of the Tax Credit Office’s decision-making in disputed overpayment cases. It concluded that staff were making consistent, firm but fair decisions and that the quality of their decision making was well supported and controlled by managers. Nevertheless, based on the cases my office has investigated, there is some cause for concern.

5.56. The test of whether a person reasonably thought their award was correct involves the decision maker putting him/herself in the customer’s shoes. It requires consideration of all the circumstances surrounding an overpayment, which might have led the customer to think that their award was correct. Yet, the cases seen by the Ombudsman suggest that the decision-maker can sometimes focus on the factual events as they appear to the Revenue such as a particular award notice being generated or a payment being issued, without considering the sequence of events around the time of the overpayment from the customer’s point of view. It is not always possible for a customer to tell whether it is the award notice which they receive before the payment, or the one they receive after the payment which is the one to tell them whether they have actually received the right payment. An award notice may be generated on one date, but may actually be sent to the customer some time later. A payment issued on a certain date may not actually be cleared through the Bankers Automated Clearing System (BACS) and paid into the customer’s account until several days later. The exact sequence, as it is experienced by the customer, should determine whether they reasonably thought their award was right.

5.57. Because the test is to a certain degree a subjective one, this puts an added obligation on the Revenue to consider the customer’s point of view. In one case a customer’s request for remittance of an overpayment was refused, on the basis that she would have known from her award notices that the Revenue had mistakenly classed her as disabled and entitled to a disability element in her award. In fact, none of the award notices did show her classed as disabled, nor did the award notice give sufficient information to show that a disability element had figured in the calculation of an award. A simple check of the customer’s award notices, as was done by the Ombudsman’s office, would have shown the true situation.

5.58. It has been argued by the Revenue that the fact that a decision on whether to waive recovery is revised, once the matter has been taken up by the Ombudsman, is simply because new facts have come to light. This is indeed a factor. Our concern is that those new facts come to light by virtue of the nature of the investigation which takes place once the Ombudsman is involved. The cases taken up by the Ombudsman are subject to a detailed investigation by the Revenue. A ‘whole picture’ of a customer’s case is assembled, complete with a chronology of events from the customer’s view, the series of transactions recorded on the tax credits computer, recordings of telephone conversations between the Tax Credits Helpline and the customer, the run of correspondence between the customer and the Revenue, and, if provided by the customer, the sequence of award notices received. Our concern is that, unless customers persist in disputing an overpayment and insist that it is taken up at a higher level, the full facts are not properly considered. This raises questions about the extent to which the Revenue is fairly and consistently applying its discretion not to recover an overpayment from those customers whose tax credit claims have been blighted by official error.

5.59. Decisions concerning whether or not an overpayment should be recovered should be determined in a fair and transparent manner. It should be clear to the customer affected, why their request for reconsideration of recovery has been refused. At present, customers who are turned down do not always understand why. The issues they may have raised in their application for reconsideration of the decision to recover are not addressed in the computer-generated letters they receive. The result can be that a customer tries again to have the decision looked at, either using the complaints mechanism or by complaining to an MP. Clearer, more comprehensive explanations of the reasons why a request to reconsider recovery has been turned down might well diminish the number of cases where customers feel compelled to make their case again on the matter.

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Conclusion

5.60. The new streamlined procedures to deal with disputed overpayments which arose during 2003-04 and which have been identified in-year during 2004-05 are a recognition by the Revenue that special measures are needed to deal with the large numbers of cases which have arisen due to the processing errors during the first two years. The Revenue is confident that, during the course of 2004-05, processing errors did reduce substantially, and that therefore the current backlogs are a ‘bulge’ which will not recur. We are concerned, however, about customers who have already been refused what is called ‘official error relief’, who may well have qualified under the new streamlined procedures - particularly those cases where the Revenue accepted that the overpayment in question was caused by ‘official error’, but has still declined to write off the overpayment. We also consider it would be unfair to omit from consideration those customers affected by official error during 2004-05, but where the overpayment is not identified until year-end. Fairness dictates that all cases should be treated consistently.

5.61. The cases I have investigated are striking in the sheer range and extent of processing errors affecting tax credit claims during the first two years, leading to overpayments for which customers were not responsible, but which they had to repay. A heavier burden was placed on customers than was reasonable to spot the wide variety of mistakes and omissions which occurred as a result of processing faults. Given customers’ unfamiliarity with the new system, its sheer complexity - particularly when customers’ circumstances change, and, above all, the wholly exceptional extent of the Revenue’s processing errors during the first two years:

I recommend that consideration be given to writing off all overpayments caused by official error which occurred during 2003-04 and 2004-05.

I believe that there may well be a case for such a decision simply on value-for-money terms, given the accumulated cases which are building up for this period and which still have to be dealt with and the staffing costs involved in these. The estimated administrative cost of dealing with disputed overpayments in 2003-04 and 2004-05 is around £8.5 million.

5.62. Considerable resources have been devoted by the Revenue in the last two years to dealing with the fall-out from the extensive processing errors which have affected customers’ awards in the last two years. Leaving aside the problem of the overpayment backlogs relating to this earlier period, the Revenue believes it may now have the situation under control. Now may therefore be the time to consider whether the test applied when an ‘official error’ has occurred, to decide whether recovery of an overpayment should be waived, is the most appropriate test to use in the context of tax credits.

5.63. Having looked carefully at the cases which have been referred to me, I am not convinced that the current test 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.

5.64. I am conscious of the fact that, within the benefits system, a statutory test for the recovery of overpayments has been applied for many years. In general, an overpayment of a social security benefit must be repaid if the claimant has misrepresented or failed to disclose a material fact. There is long and established case law on how this test should be interpreted. A claimant who is unhappy about a decision on recovery can appeal to an independent tribunal. Tax credits resemble benefits, in that they are income-related cash payments paid by a government department, intended to help people on modest incomes with their daily living expenses. Indeed, they have replaced previous benefits paid for the same purpose.

5.65. This test seems to strike the right balance between the obligations on the part of the administrators and those on the part of the recipients. It is therefore difficult to understand why this model of a statutory test should not be applied in tax credits cases, with a right of appeal to an independent tribunal.

I therefore recommend that consideration is 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.

Footnotes

32 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.

33 See Welfare Rights Bulletin 184, February 2005, Child Poverty Action Group (CPAG)

34 See Revenue letter to the Parliamentary Ombudsman, 21/4/05, Appendix C

35 Hansard, 6/06/2005, cols 297-299 W

36 See Revenue letter to the Parliamentary Ombudsman, 21/4/05, Appendix C

37 Ibid

38 Hansard, 6 April 2005, col 460WH

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