Where’s the benefit?

It is not every day that Tony Blair apologises for a government
failing, but in the midst of the recent tax credits fiasco, he had
little choice. Those on the receiving end of “the hardship and
distress” for which he apologised can only hope that he follows
through with his pledge “to change the circumstances in which they
find themselves”.

Blair said sorry in light of two damning reports about the problems
surrounding the tax credits system, which were published last
month. One of these, from charity Citizens Advice (CA), found that
where families had been paid too much tax credit, the government’s
decision to claw back that money was leaving people in severe
financial hardship.(1)

Official figures from HM Revenue and Customs (HMRC), the government
department responsible for the system, show that at the end of the
tax year 2003-4, one third of all tax credit awards – 1,879,000 –
had been overpaid. In more than 600,000 cases the overpayment had
been by £1,000 or more; in 40,000 cases it was more than
£5,000. The recovery of these overpayments, which amount to a
staggering £1.9bn, has resulted in tax credit payments being
drastically reduced – or in some cases stopped virtually overnight
– plunging families into despair.(2)

According to the CA report, the manner of the recovery has resulted
in some families being left with incomes of just £56 a week,
threatened with repossession or eviction, or forced to give up work
because they are unable to pay for child care. In some instances,
CA advisers have had to arrange Salvation Army food parcels to help
those families left without enough money to buy food. Worryingly,
some families had been ill-advised by tax credits staff to take out
loans in order to cover the repayments. In total, CA handled
150,000 tax credit problems between April 2004 and March

In another report, the parliamentary ombudsman, Ann Abraham, says
that complaints about tax credits have continued to rise and that
in the first two months of this business year they represented
almost a quarter of all cases referred to her. She found that the
design of the tax credits system does not take account of people’s
needs and that much better customer services are required.(3)

She also found that the well-publicised tax credit system’s
teething problems had not been completely overcome and the then
Inland Revenue (which became part of HM Revenue and Customs) had
been over-optimistic.

Gary Vaux, head of money advice at Hertfordshire Council, sums up
the view that many share about the tax credits system: “It’s a
total shambles. It’s probably the worst administered benefit that I
can ever recollect in more than 20 years of doing welfare benefits
advice work,” he says.

In his opinion, since the inception of the current tax credits in
April 2003, governmental responsibility has been misplaced.

“The Inland Revenue is great at taking money off people but pretty
awful at giving it back. The wrong organisation is involved in
delivering it. Through gritted teeth I’d almost say the Department
for Work and Pensions would be better.”

Like others, he believes that the system, which is based on an
individual’s yearly income and requires people to inform the HMRC
about changes to their circumstances, is ill-designed.

“Imagine a person in a low paid job. Their hours may go up and down
and their home life may be more chaotic. People whose lifestyles
are more complex and who are living week-to-week, hand-to-mouth
can’t rely on a system that is not that bothered about getting the
weekly payments right. Tax credits are too inflexible to respond
quickly to changes of circumstance. The system is often two or
three changes of circumstances behind where people are.”

Vaux says that the system was based on models from Australia, where
there were serious problems of overpayment, and Canada. “It is
chaotic but predictable chaos, which is worse still. Lessons could
have been learned from abroad.”

Most of the tax credits complaints made to the parliamentary
ombudsman have been in relation to the recovery of overpayments.
The most severe problems arise when a potential overpayment is
detected during, as opposed to at the end of, the tax year. To
prevent the overpayment from happening steps are taken immediately,
and this can mean drastically cutting, or halting, payments for the
remainder of the year. By contrast, if the overpayment has already
happened, families have some protection as the payments are usually
only reduced by 10 to 25 per cent.

Janet Allbeson, policy consultant at the charity One Parent
Families, says that the draconian recovery and dealing with HMRC
can result in misery for parents.

“Some people feel stressed and depressed and are unable to sleep as
they worry about the debt and how they are going to pay it. It has
affected people’s mental state a lot,” she says.

The confusing payment award notices that are sent out to people
haven’t helped matters.

“The notice doesn’t say you have been overpaid. There is a stream
of figures about your payment and you have to piece it altogether
and work out what happened and why your money has gone down,” she

The system, which is automated, has also meant that some people
have received as many as 10 notices in close succession, adding to
their general bewilderment.

While it can be difficult for any family caught up in the
overpayments fiasco, some families are more vulnerable than others.
Derek Sinclair, welfare rights worker for Contact a Family, says:
“It can particularly be a problem if a child has a disability as
there may be extra disability-related costs such as higher heating
costs, special dietary requirements or complimentary

One in three of the people he has spoken to say that their
overpayments were caused by an official error, yet hardly any had
been waived. There is no independent appeals system and it is down
to the HMRC to accept that it has made an overpayment mistake,
which a client couldn’t reasonably be expected to spot – and this
can take time.

“Parents can wait months for a decision to be made. Some cases are
taking six months and in the interim deductions continue to be
made,” says Sinclair.

That the tax credits system is in crisis is not in question, but
the long-term remedy is. And time is not on the government’s side
as during the course of the next year a further 800,000 families
are due to be transferred over to the HMRC system – a move that in
the current climate would surely only add to the chaos. Had the
government paid more attention to the tax credit experiences of
other countries, much of this chaos could have been avoided in the
first place – and Tony Blair could have said sorry for something

(1) Money with Your Name On It, Citizens
Advice, 2005
(2) Child and Working Tax Credits, Finalised Awards
2003-4, National Statistics, 2005
(3) Tax Credits: Putting Things Right, The Parliamentary
Ombudsman, 2005

Tax credits 
The current tax credit system was set up in April 2003.
There are two types: the child tax credit and the working tax

Child tax credit is a payment for families with children. The
amount varies according to income and is paid directly to the main
carer. There is also a disabled child and severely disabled child

Working tax credit is a payment to top up the earnings of low paid
people, including those who do not have children. Claimants usually
need to work a set number of hours a week depending on their
circumstances. There is a disabled worker element for people who
usually work 16 hours a week and who have a physical or mental
disability which puts them at a disadvantage in getting a job,
provided they meet certain conditions.

Source: HMRC

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