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<b>Tax News:</b> HMRC slammed again over tax credits. By Nichola Ross Martin

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25th Apr 2006
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The Committee for Public Accounts has severely criticised HMRC's continuing inability to account for the full costs of the new system of tax credits. The Committee released its 36th report today: New Tax Credits.

Chairman Mr Edward Leigh MP said: "An element of overpayment to claimants was an inherent part of the design of the tax credits system. What came out of the blue for the government was that overpayment would routinely occur on such a gigantic scale ' an estimated £2.2 billion for 2003'04 and probably again for 2004'05. This is a deplorable situation for the hundreds of thousands of vulnerable families who have to find money for repayments. HM Revenue and Customs is struggling to extricate itself from this morass, but about £1 billion of debt from the first two years of the scheme will probably never be recouped. It is too early to tell if the changes to the scheme announced in the Pre-Budget Report will be successful, but it is worrying that the Department could not provide detailed information on the estimated cost of these changes which might be significant.

"HMRC still hasn't been able to come up with a reliable estimate of the amount of public money being overpaid under the Tax Credit scheme as a result of fraud and error. It expects to have a final estimate by Spring 2006 ' but only in respect of the year 2003'04. The information will then be well out of date. Doubts about HMRC's controls over fraud were certainly not lessened when evidence emerged late last year of a serious assault on the system by organised criminals."

At the heart of the tax credits problem is an expensive and unreliable computer system, and judging by comments made MPs see there being a less than wholesome relationship between the Government and its computer contractor EDS.

Mr Liegh went on to say: "The computer system underlying the Tax Credits system has been highly problematic from the outset. There were serious difficulties in its introduction. In use it is fragile and complicated to the point where HMRC itself feels it does not fully understand its workings. And software errors have led to unforeseen overpayments.

"The Department has announced a settlement of over £70 million in compensation from its previous IT contractor, EDS. But the agreement dictates that, if the Department is to secure £26.5 million of this sum, EDS must win further work from the government. This is an unwelcome arrangement which places the government in an invidious position."

HMRC calculate that overpayments account for nearly 14% of the £15.8 billion of tax credits paid in 2003/04. The Department estimates that there will be a similar level of overpayments for 2004'05 awards.

The recovery of these overpayments has caused hardship to many families and the Department has struggled to manage disputes with applicants about recovery. It has made a provision for some £1 billion of doubtful debts.

The chancellor's pre-budget report included new measures to simplify the Tax Credit scheme and reduce levels of overpayments. The main change, as from 2006'07, will be to raise from £2,500 to £25,000 the threshold for increases in income which will be disregarded when provisional awards are re-assessed. There will also be new responsibilities on claimants to tell HMRC promptly about changes in their circumstances. The Department considers that these measures should eventually reduce overpayments by one third and limit automatically the rate of recovery of overpayments. Awards for the first three years of tax credits, will however, continue to be subject to the original provisions.

The comptroller and auditor general qualified his opinion on the Inland Revenue's Trust Statement as Tax Credit overpayments arising from claimant error and fraud were initially estimated at around 3.4% by value, some £460 million. This is an early estimate and the figure is expected to rise once the Department's investigations have been completed. The Department closed the Tax Credits internet facility on 2 December 2005 because of attempts to defraud that system.

There were serious problems with the computer systems during the introduction of Tax Credits in April 2003, which continued to have ramifications in 2004'05. The Department considered that EDS (its former IT supplier) was responsible for these problems and sought compensation. On 22 November 2005 the Department announced that it had concluded a settlement of £71.25 million with EDS. Of this sum, £26.5 million will depend on EDS winning future work from the Government. The terms of the agreement are subject to a confidentiality provision.

The Committee of Public Accounts is appointed by the House of Commons to examine "the accounts showing the appropriation of the sums granted by Parliament to meet the public expenditure, and of such other accounts laid before Parliament as the committee may think fit" (Standing Order No 148). The Committee says that it will continue to review tax credits.

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By listerramjet
25th Apr 2006 11:47

hmmmm
i wonder if EDS designed the system and the procedures around it, or whether they built it based on the specific requirements of HMRC? Sounds like they are carrying the can for design faults regardless of whether this was in their brief.

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By User deleted
25th Apr 2006 13:22

Tax Credits
Tax credits should be abolished all together...they are far too generous and create a welfare dependence.

The majority of peolple that I know who claim them either have underclared their income or spend the money on certain luxuries such as a new computer or a holiday. What do you expect from a socailist government that has not got a clue about working hard for your money!

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By stratty
25th Apr 2006 12:50

The system is flawed
Paying tax credits for the current year based on historical income for last year will always cause problems.

May be easier to pay in arrears, i.e. tax credits for the prior year based on income for that year.

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