Tax credits continue to cause problems for clients and advisers alike. Even the National Audit Office is involved, investigating the recent payment problems.
Because tax credits are the responsibility of the Inland Revenue, it almost takes a leap of imagination to think of them in terms of welfare rights. But if we don’t, there could be some awful consequences for our clients next year and for years to come.
The biggest problem is what happens when there are changes of circumstances. It is crucial that we keep an eye on these, as our clients could find themselves with massive bills for overpaid credit or find themselves living substantially below what the government says they need to live on.
I heard recently from a social worker who was under the impression that her client’s tax credit award was fixed for the year (as used to be the case with the former working families’ tax credit). Her client has started to incur child care costs and she wanted to know whether she had to wait until the end of the tax year in April 2004 before her client could receive any help with them. In fact, her client could indeed choose to do that. Their tax credit for 2003-4 would then be reconciled and they could be due back pay. But it would make more sense to ask the Inland Revenue to recalculate their tax credit as soon as child care costs start to incur.
But what if child care costs have fallen or stopped since the tax credit claim was made? In those circumstances, the claimant does not have the choice of waiting until the year end. They would actually face a penalty of up to £300 if they did wait. The law is clear, but not fully appreciated: if child care costs fall by more than £10 a week for more than four weeks running, the Inland Revenue must be told.
This requirement to notify the Inland Revenue also exists if a couple separate or if a single claimant becomes part of a couple. Just about everything else will theoretically be swept up in the end-of-year reconciliation, which means that in April 2004, everyone will reapply for tax credit based on their 2003-4 income. This figure will be used to calculate any underpayment or overpayment from this year, plus the 2004-5 entitlement. You also have to remember that tax credit for 2003-4 has been based on income from 2001-2.
Imagine the scenario: a claimant has been awarded £3,000 tax credit this year but this includes a £1,000 overpayment. Next year, on their new income, they are entitled to only £2,000. But they will in fact receive just £1,000 as the overpayment is recovered. Simple enough for the Inland Revenue and technically correct – but families who have budgeted for a certain level of tax credit will find it difficult to adjust.
Vast numbers of tax credit claimants are already on the “wrong” rate of benefit because their circumstances have changed, especially compared with 2001-2 income. The Inland Revenue doesn’t mind that – they almost welcome it, as it saves them from doing mid-year adjustments. But I don’t think we can be as sanguine. Part of our task must be to smooth out the peaks and troughs of tax credit awards so that what is in payment closely matches our clients’ current circumstances.
Gary Vaux is head of money advice, Hertfordshire Council. He is unable to answer queries by post or telephone. If you have a question to be answered please write to him c/o Community Care.