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Last Updated: Tuesday, 5 February 2008, 00:02 GMT
Tax credits not improving say MPs
Pic: Tax credits web site
Not much has improved say MPs
There has been no improvement in the way the tax credit system works, says the latest report by MPs on the Public Accounts Select Committee.

Their fifth report since the system started in 2003 says nearly two million families a year are still being placed in debt by tax credit overpayments.

And no targets have been put in place by HM Revenue and Customs (HMRC) to cut losses due to fraud or errors.

However the Revenue said recent changes had led to big improvements.

"This report relies on data captured only up to 2006," said an HMRC spokesman.

"Overpayments have fallen by a fifth and accuracy in processing payments has reached 97%.

"HMRC's security measures stopped the vast majority of fraudulent claims before any money was paid out," he added.

Serious

Despite the repeated public commitments from government ministers to improve matters, the MPs believe that there is very little evidence of things getting better.

Many claimants continue to struggle to understand tax credits and why they are overpaid
Edward Leigh, MP

"The tax credits situation is as serious as ever," said the committee's chairman Edward Leigh MP.

"HMRC's attempts to bring the system under any measure of control have so far not been crowned with conspicuous success.

"Many claimants continue to struggle to understand tax credits and why they are overpaid," he added.

Improvements

In the past year two important steps have been taken to make the system work better.

TAX CREDITS BY NUMBERS
65bn paid out since 2003
System costs 587m a year to administer
Fraud and error now costs 1bn a year
6bn overpaid in first 3 years
2.3bn will not be recovered
3.3bn still to be recovered
Source: Public Accounts committee report

At the start of the 2006-07 tax year a 25,000 "disregard" was introduced, instead of the previous level set at 2,500.

This means that any increase in a family's income, up to 25,000 in any one year, will not trigger a recalculation of their tax credit award with an accompanying demand for the return of their overpaid tax credits.

That policy should remove many of the instances whereby small pay rises, or a partner in a family returning to work, produce a rise in a family's income, thus triggering a reclaim by the Revenue at the end of the financial year.

"The major changes to the tax credit system announced in 2005 have increased flexibility and certainty for families, and are expected to reduce overpayments by a further third once they are fully implemented," said the HMRC spokesman.

However the MPs disagreed and said the new policy had yet to take "full effect".

New guidelines

Last week the Revenue anticipated another complaint of the MPs and published new, fairer, guidelines aimed at making it clearer how claimants could challenge a demand made for the refund of tax credits.

The previous guidelines were described by the Parliamentary Ombudsman last year as "unduly harsh".

But the committee said the Tax Credit computer system was still making mistakes due to software errors, a factor that plagued the system when it first started.

They criticised again the settlement gained by the HMRC in 2005 against the giant US computer firm EDS, which first implemented the Tax Credit system.

This should have led EDS to repay 71.25 million to the government but the MPs say not enough has been paid so far.

They recommend fresh legal action to recover the total if it has not been paid by the end of this year.

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