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Last Updated: Thursday, 30 November 2006, 17:27 GMT
Tax credit change 'more costly'
By Rachel Spring
BBC social affairs analyst

Hina Patel
Hundreds of thousands of people like Hina Patel have fallen foul of the complicated rules for tax credits
Reforms to the tax credit system will cost three times more than the Treasury has claimed, the BBC has learned.

Parliament has been told that the 10-fold increase to the current tax credit threshold will cost 850m.

The new "tax credit income disregard" means that from April a family's income can rise to 25,000 before tax credits are clawed back by the government.

HM Revenue and Customs (HMRC) said the reforms would in fact save families a total of 2.5bn over five years.

Opposition politicians have said that the Treasury has been hiding the real cost by using "smoke and mirrors".

However, a Treasury spokesman said this accusation was absurd.

"The Treasury has provided information on the cost of the higher income disregard to Parliament in an entirely open and transparent manner," he said.

"We have always striven to be very clear on the difference between 'costs' to the Exchequer and changes in entitlement, which, although sometimes confused by commentators, are in fact separate issues."

Restoring faith

The decision to boost the income disregard from 2,500 to 25,000 was taken to restore faith in the tax credit system and save the Chancellor from more embarrassing headlines.

Since they were introduced in 2003, the recovery of tax credit overpayments has been hugely controversial, causing hardship to many families.

Some have even ended up depending on food parcels from the Salvation Army.

Old system

In the past, when asked the cost of the income disregard, government ministers gave figures showing how much more money would go to claimants.

Now the Treasury has calculated what it calls the 'Exchequer effect'.

This involves a different definition of the cost.

On the basis of this calculation, the reform in its first year will mean families get 500m more in tax credits.

However, the Treasury says this will in fact cost just an extra 50m.

Its argument goes that if the old system - with the lower disregard limits - continued in place, it would have paid out about 500m in overpayments.

Much of that would be unlikely to be recovered, or the recovery payments would be spread out over several years.

Last year, failure to recover overpayments led HMRC to write off 397m and make provision for a further 409m of 'doubtful debts'.

Thus the real difference, in the Treasury's view, between continuing with the less generous and often inefficient current system, compared to the new one with more generous limits, is estimated at just 50m a year.

'Acting disgracefully'

Mark Francois, the shadow Paymaster General, said that it appeared the "Treasury has been using 'smoke and mirrors' to try and mask the real cost, in which case UK taxpayers may have been misled."

Liberal Democrats work and pensions spokesman David Laws said: "This confirms what many people suspected all along.

"The Treasury has been engaged in an absurd attempt to cover up the costs of trying to mend Gordon Brown's defective tax credit system."

He accused the Treasury of "acting disgracefully by persistently denying this information to Parliament."

Both will be asking urgent questions of the government about the real cost of the reform.

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