Committee of Public Accounts


Press Notice No. 5 of Session 2005-06, dated 8 September 2005


FIFTH REPORT: INLAND REVENUE: TAX CREDITS AND DELETED TAX CASES (HC 412)

Mr Edward Leigh MP, Chairman of the Committee of Public Accounts, said today:

“The introduction and operation of the Inland Revenue’s New Tax Credits system have been a nightmare. The Revenue has yet to produce reliable evidence that the flood of public money being wasted under the previous tax credits scheme through fraud and error has been stemmed to any degree. And hundreds of thousands of genuine claimants, many of them vulnerable people in very difficult circumstances, have been seriously mistreated.

“The New Tax Credits system was supposed to be simpler to administer and simpler for claimants to understand. What we were given was a frustratingly arcane system which routinely overpays large numbers of claimants - some 1.8 million in respect of 2003-04. This is no kindness to people in desperate financial circumstances, for many have subsequently to cope with repayment demands by the Department. There is a general lesson here: that an ambitious scheme might be fatally undermined by its intrinsic complexity. Permanent Secretaries should flag up the risks with Ministers before such unduly complex schemes are implemented and, if necessary, seek a Direction.

“The Department has a lot of work to do to get the Tax Credits system operating fairly and effectively. There must be a question mark over its ability to do this, especially given that staff must also tackle the backlog of everyday tax collection work which has built up as a result of their being diverted to fire-fight Tax Credits problems.”

Mr Leigh was speaking as the Committee published its 5th Report of this Session, which examined the operation of tax credits and the incorrect deletion of taxpayer records.

The Government replaced the Working Families and Disabled Person’s Tax Credits with Child Tax Credit and Working Tax Credits (the New Tax Credits) in April 2003. Some 5.7 million families received Tax Credits in 2003-04 at a cost of £16 billion. In April 2004, the Committee reported on the severe problems following the introduction of the New Tax Credits, which meant that several hundred thousand claimants were not paid on time.

The Government intended the New Tax Credits to provide a system that was simple for people to understand and to administer. In practice many people have found the scheme difficult to understand. Many have complained to the Inland Revenue about the system and the frustration and misery it has caused to claimants. The administration of the schemes has also proved complex and HM Revenue and Customs (the Department) has not met its targets for the accuracy of processing and calculating awards.

Many people received overpayments of Tax Credits in 2003-04, some caused by software errors and Departmental mistakes. But the design of the system also results in other claimants being routinely overpaid Tax Credits, which the Department seeks to recover in future years. The overpayments and subsequent recovery make it difficult for claimants to plan their finances.

The Department’s most recent estimates of fraud and error, published in 2003, indicated that overpayments were between 10% and 14% by value. The Department had suggested that with the introduction of New Tax Credits error rates would be half those of the previous system, but they have no evidence that this reduction has been achieved.

Routine housekeeping software has been wrongly deleting taxpayer records for many years. As a result some taxpayers will not have received the repayment to which they were entitled, while others owe tax that will now not be collected. The Department estimates that almost one million records were wrongly deleted in the period 1997 to 2000.

To deal with the Tax Credit problems the Department had to move staff from other tax work, which created backlogs of work on taxpayers cases and enquiries. The Department needs to recover from these backlogs.

Note

A Direction is made by the responsible Minister to the Accounting Officer to implement a course of action against which he or she had advised the Minister on value for money or regularity or propriety grounds.


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