Committee of Public Accounts


Press Notice No. 14 of Session 2003-04, dated 22 April 2004


FOURTEENTH REPORT: INLAND REVENUE: TAX CREDITS (HC 89)

Mr Edward Leigh MP, Chairman of the Committee of Public Accounts, said today that the introduction of the Inland Revenue's New Tax Credits system was nothing short of disastrous, and urged the Revenue to dramatically reduce the level of overpayments and explain to claimants how recovery will impact on other benefits.

Mr Leigh was speaking as the Committee published its 14th Report of this Session, which examined responsibilities for the problems with the new tax credit system and lessons to be learned; errors and overpayments of tax credits; and compensation for claimants and recovery of overpayments of tax credits. The Working Families' and Disabled Person's Tax Credit schemes administered by the Inland Revenue (the Department) were replaced with New Tax Credits from April 2003. The New Tax Credits are estimated to cost about £16 billion in 2003-04. The introduction of the new scheme and associated IT systems has brought a number of problems for several hundred thousand claimants who were not paid on time, for employers who made some of the payments and for the Inland Revenue. In August 2003, the Department disclosed the results of their examination of samples of 2000-01 tax credit applications which estimated the level of overpayments under the old tax credits schemes at between 10% and 14% by value; equivalent to between £510 and £710 million for a full year.

The Committee found that the Department should have been more cautious and realistic in fixing the timetable and assessing the resources needed for setting up and testing New Tax Credit systems; including assessment and payment procedures and checking claims. Their failure to do so has had serious financial consequences for many thousands of citizens and caused disruption for other areas of work for the Department. To the extent that these large complex systems could not be tested sufficiently to eliminate such problems, the Department should have devised more comprehensive contingency arrangements.

New Tax Credits is one of a series of major IT systems that have caused serious problems, other notable cases being the National Insurance Recording System (NIRS2) and the Passport Office system. Since the Committee's hearing, the Office of Government Commerce have updated their Gateway review guidelines. The Office of Government Commerce should analyse the weaknesses of IT partnering arrangements that have run into problems and draw together experience, best practice and guidance with the aim of helping departments to understand better how to manage the problems inherent in such partnering relationships.

The level of errors in tax credit payments is unacceptable at 10% to 14% by value. The Department said that they expected an immediate halving of error rates with the introduction of New Tax Credits. They should take all necessary steps to achieve this predicted reduction, including comprehensive cross checking to other departmental information sources, setting quantified targets and timescales for further reductions, and reporting their performance against these targets.

The Department preferred not to launch a campaign to draw attention to compensation available for claimants who suffered as a result of the system problems. They saw their compensation arrangements for claimants as being voluntary and spontaneous. The Department should monitor the effectiveness of their arrangements and, if the number being compensated in this way is unrealistically low, target such a campaign at those likely to have been most disadvantaged.

The Inland Revenue should explain to those affected how recovery and non-recovery of overpayments of tax credits will take account of implications for other benefits. They should clarify the main interdependencies of tax credits and other benefits, such as Housing Benefit, which are the responsibility of the Department for Work and Pensions. Both Departments should operate to a coherent and consistent policy that is equitable for those who were affected by New Tax Credit delays and errors in 2003 and those who are affected in the future.

Mr Leigh said today:

"The problems that arose when the Inland Revenue's introduced the New Tax Credits scheme are well known. It was nothing short of disastrous, with hundreds of thousands of claimants not paid on time, inevitable hardship for some, inconvenience to employers, and disruption to other parts of the Revenue's business. The Revenue should have been more realistic in setting the timetable and have put in place better contingency arrangements. Going forward the Revenue must make sure it is successful in dramatically reducing the level of overpayments - as high as £700 million a year under the old system. It should also explain to claimants how its recovery of overpayments will impact on other benefits."


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