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Last Updated: Tuesday, 6 June 2006, 10:59 GMT 11:59 UK
MPs criticise tax credits again
A cashbox
About 2bn has been overpaid in each of the past two years
HM Revenue & Customs (HMRC) has been accused by MPs of ignoring the extent to which its own mistakes have led to the overpayment of tax credits.

The Treasury Select Committee's report concluded that official error had been a cause of overpayment in a "significant number of cases".

The tax credit system should be re-designed to focus on the needs of the claimants, the report added.

It welcomed the fact that money is now paid to 19 million adults and children.

But it said there needed to be a culture change at HMRC if the tax credit system was to be improved.

If families' circumstances have changed from one year to the next, they may no longer be entitled to the same level of tax credit

The MPs concluded that things could not improve until the HMRC understood properly the reasons for overpayments.

"If HMRC is to succeed in improving the administration of the tax credits regime, the first thing it needs to understand is what is going wrong with its own processes, before it looks for problems elsewhere," the report said.

Errors overlooked

The MPs said that the assessment of tax credit claims depended on civil servants carrying out individual administrative functions or tasks, rather than trying to ensure that claimants got the right amount of money.

And their report said that official errors had contributed to many overpayments.

The MPs criticised the attitude of the Paymaster General Dawn Primarolo.

They said she appeared to have overlooked errors by her staff, or mistakes by their computer system, as some of the main sources of mistaken benefit awards, and had concentrated on blaming mistakes by claimants instead.

In recent times, Ms Primarolo has faced calls to resign over her handling of the tax credit system.

New system

Since it was introduced in 2003 the system of tax credits has come in for regular and widespread criticism.

Paymaster General Dawn Primarolo
Dawn Primarolo has come in for further criticism over tax credits

The main problem has been the overpayment of about 2bn to two million claimants in each of its first two years of operation, which has then been followed by demands for the repayment of the money after it has been spent.

End-of-year adjustments to tax credits, the committee argued, came too late, so the demand for repayment of overpaid money was "keenly felt".

A key failing of tax credits, according to the MPs, is that they do not take into account the fact that the people who need the money most, those on low incomes, are also most likely to see big variations in their monthly incomes.

The MPs suggested making benefit awards over shorter periods of time.

Thus a system based on making an annual assessment of their entitlement to benefits is unlikely to do so accurately.

Research cited by the committee suggested that the incomes of one-third of families who were studied became more volatile after receiving tax credits than before.

Reforms

Earlier, Stephen Timms, chief secretary to the Treasury, said that despite widespread overpayments the tax credit system had "improved".

"This is demonstrated by the improvements made to accuracy in processing and calculating awards, which rose from 78.6% in 2003-04 to 96.5% in 2004-05," Mr Timms said.

He added that recent reforms of the credit system would help cut the number of overpayments by a third.

From this financial year, claimants have to inform the HMRC only if their income rises by 25,000 in a year, not 2,500 as before.

But the MPs argued that this higher "disregard threshold" could mean a significant drop in benefit for some claimants in the following financial year, about which they should be warned.


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