Tax credits: What are they good for? By Simon Sweetman

@ Clint

A second point on my colleague's case that didn't seem to make any headway with HMRC was the "penalty should not exceed amount owed" maxim (chapter and verse please ?)

He tried pointing out that if he was actually due the payment, he should not now be asked to pay back (or penalised) any more than had been actually been overpaid - which he was quite willing to do if any overpayment had been made.

Plus if this was a "tax credit" payment should it not be reclaimed via the tax codes etc ...

So it does seem to be the case that:
- if you do not send in the correct status update, you will be liable to a penalty equal to the whole of the tax credit already paid to you for the previous period, regardless of whether there was overpayment or not.

How does this reckoning fit in with existing tax penalties and procedures ?

... with Mike Whittaker's colleague, who is in the same position as a huge number of claimants who are "overpaid" due to the technicality of having failed formally to renew the claim. We have a client who was paid £3000 in tax credits for a year, which would ordinarily have been her correct entitlement but for one simple failure to pick up the telephone in July and say "stet". HMRC are now pursuing repayment with a vengeance.

It would be interesting to know how much of the £1 Dome overpayments showing up in the statistics are only showing up as overpaid because of that simple common failing. Maybe the Freedom of Info Act may elicit something.

... that we ignore them, just because we all agree that the system sucks? I keep hearing stories of accountants who claim to opt out, but whenever I turn up on the tax credit courses I see the same old friendly faces in the crowd.

Anyway I did not think that we had any choice in the matter. To suggest that it is simply a marketing opportunity is only half the story. Your PI underwriters are unlikely to be impressed if you get a negligence claim and your only defence is that you excluded it from your letter of engagement.

A colleague who had been on TC following a spell out of work post 2001/Q3 has been approached for repayment of TCs since he apparently did not complete a 'status update' form; they said they needed to have the form returned to know whether he was eligible for the TCs.

He told them than since he had filled in a Tax SA for the appropriate years they surely had all the data they required.

They replied that having the SA data was not enough, it had to be on the TC form as well. (Disconnect within the HMRC Tax System surely ?)

In addition, since the form did not get filled in at the right time, it was now deemed that he had ipso facto been overpaid regardless of his income for the period - even though they have details of his earnings for the period from the SA - so they now want £2500 back from 2003-4 when he and his wife were indeed grateful of the support.

So - more like a loan, it would appear ...!

What's going on there ???

That the tax credits overpayments in 2006-07 are down to 1 Dome (£1bn)

http://nds.coi.gov.uk/Content/Detail.asp?ReleaseID=367984&NewsAreaID=2

Principal cause of this will of course be the increase in the income disregard from £2.5K to £25K.

Onward and upward.

The tax credits system is a total shambles. Not long after the birth of our twin boys approx 5 years ago my partner developed serious mental health problems. This led to me throwing the towel in on my accountancy practice as I had to spend so much time looking after the kids. Obviously this led to my income tailing off and so I looked to tax credits to help through this dark cloud. These were paid to my partner as the mother of the children. After receiving stage payments for approx 3 months she then received approx £2000 in one sum. At the time I told her that this did not look right to me but I was struggling with the calculation of what we were entitled to. I told her to keep it on the bank account and I wrote to the TCO to tell them that I thoiught they had overpaid us. No reply was forthcoming for at least 6 months despite two reminders from myself. In the meantime, unbeknownst to me, my partner went out and spent the money on a car (ouch!). I separated from my partner approx 18 months later due to her violent behaviour and mental health problems. Since then the TCO have pursued me for repayment of the overpaid credits. I have been through an appeal process where I detailed all of the above and also advised them that my current circumstances are very difficult because I pay to support my ex (who still lives in my house!), pay rent and bills for my current flat and support my children but it was decided by the TCO that I had no grounds to not repay the money!!!! The salt in the wound is that you have no right of appeal against their decision which I think is ridiculous. So you can guess what I think about tax credits.

I cannot state strongly enough how much I detest the whole tax credit system.

My son is now three and I have therefore had to use this appaling system for three years. We've never received much money, about £20 per month, but as far as I was concerned that was better than nothing.

Last November we received threatening phonecalls from HMRC's collections department as apparently we had been over paid £250. Despite numerous phonecalls (and holding for 20 mins each time) no-one can/will tell us what this overpayment relates to, no-one will give me a breakdown of any calculation that was made and no-one seems to have any idea what is going on.

So as we stand I am now receiving £8 per month in Tax Credits and then pay £10 per month to Collections.

Not to big myself up, but as an ACA now working in tax, if I do not understand the system what sort of chance do those whom the Tax Credit system is aimed at have.

As others have said, tax credits were bound to fail. IMHO, the reason is because of the political deception that surrounded their creation. GB did not want to make the Government balance sheet look bad by increasing welfare payouts, so he hit on the "brilliant" idea of tax credits which, as negative taxation, would instead appear as a reduction in the amount of tax collected.

Why did this have such a pernicious effect? Because as a tax issue the task of administering it went to HMRC whose expertise is in collecting money in, rather than to DWP whose expertise (?) is in paying money out. The DWP works on a weekly timescale that, in theory at least, can cope with rapid and frequent changes in claimants' circumstances. The tax system works on an annual basis in arrears, which is the fundamental, and completely foreseeable, reason for the chaos that has ensued.

The problems with the Tax Credits system are many and varied, but a brief summary:

1) Mainly, they are "means tested", which inevitably means complicated forms - and those who, arguably, are the most deserving recipients are often the least capable of filling out the onerous forms involved.

2) Being means tested, they automatically punish good financial management, encouraging spending beyond your means. They also encourage the disposal of any preexisting assets, further undermining the financial stability of the recipient.

3) Because they rely on individuals providing information, and because the Government is incapable of trusting said individuals to providing correct information, TCs require a vast army of bureacrats to investigate and police any claims. At a guess, this costs more than the money actually paid out to claimants, although I couldn't prove that.

There are lots of other issues with tax credits - but the above are the main complaints (from my POV).

In the eyes of the Labour Party Tax Credits may be a tool against poverty.

In my experience however it is just another benefit (how can it be a "tax credit" when most of the receipients don't pay tax in the first place) and as such has been open to abuse. Many employers now complain that their employees will not work more than 16 hours because "this is the level at which the benefit is maximised"

The system to administer Tax Credits , together with irrcoverable overpayments, is costing the tax payer billions annually.

A far more, and corruption free, method of helping the lower paid would be to raise personal allowances to £10,000 per person and make them transferable for couples.

...... Gordon brown and New Labour wouldn't be let within a hundred miles of the Treasury.

As I understood it - tax credits were initiated to bring a connection between work/tax and benefits - they were meant to reward those who chose to work but had relatively low earnings. The idea being that if you worked you would be better off than just being on benefits. What has happened is that many find there are barriers to improving your lot by working harder or longer, since as with almost any benefits system there comes a point when you are worse off, or, it is easier to stay at a particular level.

Even after all this time, I don't think the general public see the intended connection.

What the system has done is bring far too many people into a quasi-benefits system - at huge administrative cost.

I would prefer targetted help to those in need - so that those who are not in need don't become entangled with the benefits system.

Child benefit has always been a good benefit, and, I understand very cheap to administer.

Simon's suggestions of taxing CB at higher rates of tax may have some merit, but certainly, raising personal allowances etc so that they cover the minimum wage would be much fairer - although there would need to be staggered NI and tax rates, to allow the transition between low paid and better paid to be worth the extra effort of the worker.

>>the concept of what is a family has changed, and that the model of the married heterosexual couple as the basic unit is no longer sufficiently universal to be used as a model here<<

Why then did you use a picture of a married heterosexual couple for this article when a photo of, for example, a gay family would have been more thought-provoking?

But the scheme itself has always been doomed to failure, in my opinion.

It started with the political decision to ignore the problems of the self employed and to discourage at the outset the involvement of professional agents to assist the claimant despite a mounting complexity in the legislation, incompetence of the administering body, and ignorance of the public.

The whole thing is based on a fraudulent representation that it is a reduction in tax (which is socially acceptable) rather than a benefit claim (which carries a stigma). And that is tied in with the basically odious practice of having a starting position that over-taxes the target population initially and then requires you to beg some of it back as a supplicant.

At a technical level, one of its greatest problems is the discrepancy between the deadlines for required action and the periods over which means-testing is calculated, so that someone who does not expect to qualify discovers toward the end of the tax year that he would have qualified on the means test from the commencement of the year but is by then out of time for registering a full year's claim.

Now the TCO is under siege, and it shows.

Kind of tricky, as most possibly do not want their photos on the interweb. So how about same sex frogs?

or maybe, asexual paper people will do?