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Tax credits error rate is 'not good enough'

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3rd Jun 2005
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The level of error in tax credits awarded to the poorest families is "just not good enough", the Child Poverty Action Group warned after figures released on 1 June showed that overpayments occurred in a third of cases.

HM Revenue and Customs published an analysis of "finalised" 2003/04 awards, based on circumstances and incomes in 2003/04 as reported by 5 April 2005.

The tables show that nearly half of the 5.7m awards made in 2003/04 had to be adjusted. Overpayments arose in 1.9m cases, giving rise to excessive payments of £1.9bn. There were underpayments in just over 700,000 cases, amounting to £464m.

Budgets 'thrown into chaos'
"These figures are deeply concerning," said Kate Green, chief executive of the Child Poverty Action Group.

"While the problems with the wrong payments being made continue, those who are suffering the most are the poor." The level of error affecting families in the lowest income group is "not good enough," she added.

Liberal Democrats work and pensions spokesman David Laws said the figures reflect serious problems "not only with the computer system, but within the tax credit system itself".

"Millions of families are having their budgets thrown into chaos, causing serious problems and hardship, especially for those on low incomes."

He added: "But what these figures do not show is how many of these overpayments were a result of official error and how many the Revenue will write off.

"Last week's statement by the Paymaster General about changing the way overpayments are clawed back was an implicit admission that the Inland Revenue have not been acting responsibly in the past."

Arguing that the policy of reassessing income at the end of the award year is flawed, Laws called for a return to a system of fixed awards to "end this bureaucratic nightmare".

Trouble ahead
John Andrews, chairman of the Low Incomes Tax Reform Group, told TaxZone that further problems lie ahead.

"The Government are suggesting that the level of overpayments are a blip and will reduce dramatically when the system settles down. My view is that many aspects of the system have yet to have a bright light shone upon them and when this happens all sorts of further problems will emerge," he said.

"Hopefully these will not be on the same scale, but it is vital that the issue of recovery of overpayments that are identified in-year is changed to protect the very poorest."

Economic growth
HM Revenue and Customs said the vast majority of the overpayments were caused by "rises in family income, the result of a growing economy and more people moving into work".

"Clearly, a key challenge now is to encourage the reporting of such rises to the Revenue more quickly, in order to minimise people's overpayments in the future," HMRC said in a statement.

It added that the remainder of the overpayments were the result of the much-publicised IT and processing errors that occurred when the system was introduced two years ago.

"The Revenue now has a new IT partner, the system is working well, and discussions are on-going with EDS about compensation for past failures."

The level of under or overpayment at 5 April 2004 reported for each award is based on the 2003/04 entitlement, calculated from the family's circumstances and income in 2003/04 reported by April 2005.

The 2003/04 awards were made provisionally on the basis of 2001/02 income and were adjusted after 5 April 2004 to reflect any changes of circumstances in 2003/04.

The 2003/04 income was used where it was less than the 2001/02 income, or exceeded it by more than £2,500.

Improvements
Paymaster general Dawn Primarolo announced six measures to improve the tax credits system last week. The Low Incomes Tax Reform Group welcomed the announcement as positive commitment.

Andrew Goodall
Editor, TaxZone

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By neiltonks
03rd Jun 2005 23:17

System is a nonsense
It always was a nonsense to make tax credits essentially a payment on account, liable to be adjusted after the event if the presumptions on which it's calculated prove to be inaccurate.

This kind of calculation is all very well in the world of high finance, where the means exist to deal with these adjustments. But to use it when making payments to some of the poorest members of society was always going to lead to grief.

Many of those who get tax credits need to spend the money on a week-by-week basis in order to survive. It's unrealistic to expect them to have the means to pay back overpayments, or deal with sudden big changes in income caused by the amount paid being reduced in order to make good previous 'overpayments'.

There must be a better way!

Neil.

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By markgosling
06th Jun 2005 12:04

tax credit shambles
The system is far too complex, and error prone. It is far to difficult for the majority of recipiants to know if they are getting the right amount.

I phoned the help line on behalf of a client to inform them of a change in circumstances. They issued a new assesment for this year increasing the tax credits by over £3000.
This would result in an overpayment of about £4000. They had failed to take into account that they have other income.

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