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Last Updated: Monday, 8 October 2007, 23:03 GMT 00:03 UK
Watchdog raps 'harsh' tax credits
Alexandra Roberts
Alexandra Roberts was one claimant who was told to repay 21,000
The tax credit system is "unfair" to some of the UK's poorest families, the Parliamentary Ombudsman has said.

As a result of the "harsh" way HM Revenues and Customs (HMRC) recovers overpayments 363,000 families are being pushed into debt, Ann Abraham added.

She called for a more sophisticated way of dealing with the problem that would not leave people at risk of hardship.

HMRC added it was looking at changes to its service that would improve the lot of its customers.

In her second report on tax credits - Tax Credits: Getting it wrong? - Ms Abraham did say that the system had improved since its launch in 2003, but work still needed to be done.

Many problems caused by technical and administrative errors, as well as a large complaints backlog, had been ironed out.

Debt worries

But complaints continue, mainly because the possibility of over-payment is still built into the system, with its annual assessment of entitlement for six million families.

This had led to a third of all tax credit payments being overpaid in 2005-06, with nearly half a million being overpaid by more than 1,000.

HMRC is already consulting on changes to the code of practice on recovery of overpayments to improve outcomes for their customers

Ms Abraham also accused HMRC staff of failing to apply overpayment guidelines properly, which had led to some "unduly harsh decisions" that had "caused extreme worry and anxiety to many low income families".

"The outcomes of some of those decisions seemed to fly in the face of the aims of the tax credit policy," she added.

Ms Abraham singled out HMRC's "reasonable belief test" for criticism, saying it created a catch-22 situation.

Under the test, HMRC staff examine whether a claimant could reasonably believe overpaid tax credits were theirs.

"They (the claimant) will receive an award, they will think that it looks a bit strange, ring up, then they will be told by HMRC that is fine, that it is OK; subsequently HMRC will say they have made a mistake and say "you rang up and said it was a bit odd, so you can't reasonably believe it was yours".

"In those circumstances it seems entirely reasonable for you to believe that the award was right," she said.

She added that as a result the system was putting off the very people it intended to help.

Change on the way

Ms Abraham's report coincided with a survey from Citizens Advice, which found problems with the tax credit system had put almost half of claimants off making claims in future.

HMRC has said improvements are in the pipeline and the position will improve due to greater leeway for claimants to earn more before losing credits.

"The Ombudsman acknowledges that the cases she reviews are small in number, and tend to be the most difficult," said a spokesman.

"HMRC is already consulting on changes to the code of practice on recovery of overpayments to improve outcomes for their customers."

From the start of the current tax year, claimants only have to tell the HMRC if their income has gone up by more than 25,000 during tax year, rather than the previous 2,500 trigger point for their claim to be recalculated.

However, the Revenue has estimated that this higher "disregard" level will still only cut overpayments by one third, so the Ombudsman predicts that she will be dealing with similar complaints for several years to come.

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