Calls for urgent tax credit change

By Louise Greenwood
BBC Radio 4's Inside Money

Charities are concerned families are being pushed into poverty

Urgent changes are needed to the practice of "clawing back" tax credit overpayments, according to charities and some MPs.

It has been estimated that up to a third of all claimants have been given too much money and are being told they must pay it back.

In some cases HM Revenue & Customs - the government department responsible for tax credits - has been taking the money it is owed from future payments, usually within the same tax year.

But campaigning charities and some MPs say this is having disastrous consequences for poorer households and the system should be changed.

BBC Radio 4's Inside Money has been investigating the system which was introduced three years ago to provide more generous levels of support for low income families.

Fundamental flaw?

Dealing with the Revenue you really are hitting your head against a brick wall Faith Stanley

The programme examined the case of Faith Stanley, a mother of three from Ipswich, who has been told she owes several thousand pounds after her entitlement was wrongly calculated.

Mrs Stanley asked for her case to be investigated under the Revenue's Code of Practice when she received her first bill for £5,000 in February.

Five months later, despite numerous phone calls and letters, she is still waiting for a response.

She said: "When you're dealing with the Inland Revenue you really are hitting your head against a brick wall. You get no response; you get no replies to letters."

Critics say tax credits have an in-built fault. Because payments are based on previous year's earnings, they quickly go out-of-date if the beneficiary's income rises.

And the time lag in processing new information means overpayments build up.

In total, tax credits cost £13.5 bn last year. The Revenue itself has said £2bn of the money it gave to families was overpaid and should be reclaimed.

Mrs Stanley, who has never had any personal debt, learnt in the course of the programme that she could owe £9,000, which is more than she earns in a year.

Who pays?

If the Revenue seeks to recover Mrs Stanley's money she could see her tax credit wiped out. "I would agree to pay it back," Faith said.

Cpag wants a freeze on the recovery of overpayments

"[But] I wouldn't be able to pay it back over 12 months. It would have to be over a longer period of time."

The Revenue told Inside Money: "When the overpayment is the result of our mistake, and the claimant could reasonably have thought that the award was right, then we can, and do, write it off.'

However, Kate Green, Chief Executive of the Child Poverty Action Group (Cpag), is concerned that the Revenues grounds for making judgements are not clear enough.

"What does it mean to be 'reasonably expected' to know whether or not the Revenue got the information right? There's no objective test."

Ms Green said there should be an automatic freeze on claw-back , at least until the end of the tax year when cases could be reassessed.

Cpag also wants the Code of Practice reviewed and recourse to an independent right of appeal.

Damning report

Paymaster General Dawn Primarolo is in charge of the system

A damning report into tax credits by the Parliamentary Ombudsman Ann Abraham in June warned that some of the most vulnerable families were being pushed into debt by claw-back.

She recommended the government consider writing off all overpayments resulting from official errors made since the scheme began.

However, responding to that report in July, Paymaster General Dawn Primarolo said the Revenue had to balance customer care with its duty to the public purse, and current policy remains that overpayments will only be written off where there was a mistake, and it was not reasonable to expect the claimant to spot it.

Unless [the government] sorts it out soon it's going to go on being a major political scandal David Laws, Liberal Democrat MP

But David Laws MP, Liberal Democrat spokesman on Work and Pensions, said all debts should be cancelled where people have kept the Revenue informed of their income but have continued to get the wrong award.

"Where the Inland Revenue has been given entirely the right information by individuals; has made a mistake and then overpaid those individuals; and in many cases they won't have realised... then I think it is fair to write off those overpayments," he said.

"The whole system is now in such chaos that I think it would be a massive administrative burden to go back... and sort out the cases where overpayment should be recovered, from those that shouldn't."

Mr Laws added: "Unless [the government] sorts it out soon it's going to go on being a major political scandal... and ministerial heads are eventually going to roll."

BBC Radio 4's Inside Money was broadcast on Saturday, 13 August, 2005, at 1204 BST.

The programme was repeated on Monday, 15 August, 2005 at 1502 BST.