Tax Credits

– in the House of Lords at 5:00 pm on 22 June 2005.

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Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip 5:00, 22 June 2005

My Lords, with the leave of the House, I shall repeat a Statement made by my right honourable friend the Paymaster General in another place:

"With permission, Mr Speaker, I want to make a Statement on the reforms that we have made and are making in the operation of the tax credit system, and to answer point by point the reports from the Parliamentary Ombudsman and the Citizens Advice Bureaux, published today, which deal mainly with the operation of the system in its first year of introduction.

"Last month, on 26 May, I announced to this House a series of measures to build upon the reforms that we have already made to the tax credit system. Those included measures to streamline procedures for recipients to inform the HMRC of changes in their income during the year and measures to simplify the information provided to families in award notices. I also announced a review so that we could make changes in the procedures for dealing with disputed awards.

"We are improving the helpline so that families receiving tax credits can have all their queries dealt with in one go and all their changes processed with one call to the helpline. I have asked HMRC where there is a dispute to consider suspending recovery of excess payments until the dispute is resolved, and where there is hardship I have asked them to ensure that additional payments are made. In other words, I have already taken measures to act upon each of the major administrative issues raised by the Parliamentary Ombudsman and the Citizens Advice Bureaux.

"Two weeks ago, when we held a debate in the House on those issues, I offered to, and have agreed to, meet a group of MPs to discuss the issues in detail. I have written to the ombudsman and the Citizens Advice Bureaux today about the changes that we have already made, offering to meet them to discuss the detail of the reforms now being introduced.

"I come to the issues of policy. As the report of the Citizens Advice Bureaux states, tax credits are the best way to deal with society's responsibility to help with the costs of bringing up children and tackling child poverty. The background to both the introduction of tax credits and the reports out today is that more people than ever before are receiving tax credits to help with the costs of bringing up their children.

"In total, more than 6 million families—around 20 million people, including 10 million children—benefit from tax credits. Four in 10 families pay no net tax as a result of tax credits. The take-up in the first year exceeds 80 per cent, so in each of our constituencies nearly 10,000 families on average benefit.

"As a result of an economy where people move between jobs more often and their circumstances change more quickly, the challenge is to adjust child tax credits to changing income patterns as quickly as possible. In fact, 3 million people now change jobs every year and often their income changes substantially.

"Seven hundred thousand children are born every year and receive different rates of child tax credit according to their family's circumstances.

"The fast-changing nature of the economy is such that around 300,000 receiving tax credits experience very large changes in their family income of more than £10,000 during one year.

"In introducing the child tax credit, the big change that we made was to move from a fixed payment based on past income not on actual income, which was recognised to be unresponsive to families' changing circumstances and therefore unfair. When the new system was introduced we decided that during the course of a year we would be prepared to adjust tax credits to changes in family circumstances.

"So the issue for the Government and all parties wishing to comment on those issues, in this House and beyond, is whether we return to a fixed system, which is clearly unfair and does not adjust for changes in family income during the year, whether we operate a system where we compensate people where their income falls but do not adjust credits downwards when their income rises, even when it rises substantially by £10,000 a year, or whether we retain the principle of getting the balance right between taxpayers and the individual family.

"I am happy to listen to the views of all parties on those issues now, but I must tell the House that when we consulted widely before the implementation of the tax credit, the overwhelming consensus was that to balance the needs of the taxpayer and those of the family claiming, the system should adjust to any drop in income and therefore compensate the claimant in full, and respond to an increased family income during the course of the year only when the family's income increased by £2,000 or more.

"I also have to tell the House that when these issues were voted on in the House there was a clear majority in favour of the proposals that we put forward.

"I will continue to keep the House fully updated on developments within the tax credit system, as I have endeavoured to do in debates and Statements in the past.

"The ombudsman, in her report, makes reference to a small part of one sentence of one Written Answer and suggests that it offers an incomplete picture. Repeatedly I have answered questions on the issue. Indeed, in a debate on 26 January, I told the House that there had been problems going back to the introduction of the computer system. More recently, I issued a Statement on 26 May setting out the situation, the action that has been taken and what more we will do to improve the system. There was an Adjournment debate on 7 June at which I responded to many of the issues raised by honourable Members.

"I will, of course, keep the House updated on the reforms that we are putting in place to improve the system, and report back on my discussions with voluntary and community organisations".

My Lords, that concludes the Statement.

Photo of Baroness Noakes Baroness Noakes Spokespersons In the Lords, Treasury, Spokespersons In the Lords, Work & Pensions & Welfare Reform 5:06, 22 June 2005

My Lords, I thank the Minister for repeating the Statement made in another place. Let me state for the record, since it was absent from the Minister's Statement, that for 2003–04 nearly 1.9 million families were overpaid amounts totalling £1.9 billion and more than 800,000 families were underpaid by nearly £500 million. That is an error rate of 46 per cent.

The cases cited in the reports of the CAB and the ombudsman are truly dreadful. Families had to be rescued with Salvation Army food parcels because forced repayments left them destitute. At the end of May, the Paymaster General announced a six-point action plan, but it was full of administrative procedures and reviews and gave no indication of how long it would take to bring about real change. It was a bureaucrat's response; it was not about relieving human misery or distress. What will the Government do now about the people whose lives they have already damaged by repayment demands, including those who have already been forced to repay at huge personal cost?

It is all very well for the Government to say, as the Minister said two weeks ago, that nearly £1 billion of the overpayment resulted from increases in family income of £10,000 or more, as if that somehow excused the Government from responsibility. People who qualify for tax credits are not rich. They may well have made a mistake or failed to spot an Inland Revenue mistake in dealing with their income changes but they will almost certainly have spent the tax credits and will face hardship when any overpayment is demanded. As today's Statement revealed, 300,000 families are in that category. Will the Government do anything at all for that group of victims in the system?

One of the big lessons is that the tax credit scheme is just too complicated. The ombudsman asked, at paragraph 1.20 of her report, in typically understated language,

"whether the degree of financial uncertainty built into the design of tax credits can ever truly work for families on modest means".

Let me put it more plainly: the system is just too damned complicated for ordinary people. Do the Government recognise that complexity is the worm at the heart of the system? Will they now carry out a root-and-branch review of the tax credit system?

It is expected that, later this year, Her Majesty's Revenue and Customs will take on a further 800,000 families transferred from Jobcentre Plus. What action will the Government take before deciding whether it is safe to let those particularly vulnerable people be exposed? What monitoring systems will they put in place to ensure that, if any problems occur, they are dealt with rapidly and sensitively? Will the Minister assure the House that none of those families will be allowed to suffer in the same way as the 1.9 million families tormented to date?

The ombudsman made 12 recommendations in her report. How many of them do the Government accept? When will they be implemented? If any of the recommendations are not to be accepted, will the Minister say clearly why not?

In the private sector, the introduction of a critical system that generated a 46 per cent error rate would result in heads rolling. Will the Minister say what action has been taken against the individuals who had responsibility for the introduction of the tax credit system? I hope that he can assure the House that those individuals no longer hold positions of authority in HM Revenue and Customs.

There were yet more IT failures in this case. I understand that the IT partner for HMRC was EDS. In the past few days, we have been treated to the unedifying sight of the Inland Revenue attempting to negotiate an out-of-court settlement with EDS through the medium of the newspapers. Leaving aside the question of whether that was a wise way in which to negotiate, I ask the Minister to tell us what outcome has been reached with EDS. How much of the £1.9 billion overpaid does HMRC expect to get back from EDS?

Only two weeks ago, the Minister answered my Starred Question on the tax credit system. I asked him then whether he would apologise for the fact that 1.9 million hard-working families had been caught up in the overpayment mess. He refused to do so. The Paymaster General has also never apologised. If there is one aspect of this miserable affair that leaves a nasty taste, it is that. I ask the Minister one more time to apologise to the 2.7 million families whose lives have been affected—severely, in many cases—by the Government's incompetence.

Photo of Lord Oakeshott of Seagrove Bay Lord Oakeshott of Seagrove Bay Spokesperson in the Lords, Treasury, Spokesperson in the Lords, Work & Pensions 5:12, 22 June 2005

My Lords, I too thank the noble Lord for repeating the Statement made in another place. As this is the first time that I have faced the noble Lord on the Front Bench, I welcome him and wish him well in his new role. The noble Lord, Lord McIntosh of Haringey, was, quite simply, a Stakhanovite, and he will be a hard act to follow.

The faces on the Government Front Bench may change, but, not for the first time, they are here trying to defend the indefensible in the face of the devastating criticisms of the failure of the tax credit system by the Parliamentary Ombudsman and the Citizens Advice Bureaux. Has the Minister read the chilling examples given by the CAB? I was most struck by the example of the lone parent who called at a CAB one Friday after her weekly child credit payments had been stopped without warning. She had £2 to get home and buy food for her two children and herself. I read of another lone parent who had had no tax credit payments for a few weeks; the CAB had to give her a food parcel from the Salvation Army to feed her children, as she had spent her last money on gas and electricity meters and baby foods. That happened in the fourth richest country in the world, while Gordon Brown holds us up to the rest of Europe as a shining example of a productive economy and inclusive society. Can we for one moment imagine Sweden, Holland or even France treating their vulnerable citizens like that?

I turn to the detailed criticisms. Do the Government accept the call in the ombudsman's report for much improved communication and easier and quicker customer complaint handling? Do they accept that the Inland Revenue's assurances given to the ombudsman a year ago were over-optimistic? Do they accept the ombudsman's view that cases considered by the office represent the tip of an iceberg? Do they accept the ombudsman's suggestion that, whenever a revenue mistake or error that has led to too much tax credit being paid is identified, the customer should be immediately notified of exactly what has happened and informed of the circumstances in which recovery can be waived?

Do the Government accept the most important practical recommendation in the ombudsman's report—it is mirrored to some extent in the CAB report, although it does not go quite so far—which is that consideration should be given to writing off all excess payment and overpayment caused by official error in 2003 and 2004? We are talking about unacceptable levels of official error. The Office for National Statistics recently reported that, of £13.5 billion paid out last year, £1.9 billion consisted of overpayments. The noble Lord heard the noble Baroness, Lady Noakes, say that, in a private business, heads would roll. Speaking from personal financial experience of running a business, I take the view that any business with such a payment system would have gone bust years ago.

My final question is probably the most significant from the point of view of the health of the public finances and of getting Britain's system working properly as a whole. Can the Minister confirm that the contractor responsible for the serious problems with the computer system was EDS? Can he assure us that it will not be allowed anywhere near the Identity Cards Bill that the Government are trying to force through, the Second Reading of which in the House of Commons takes place next week? I look forward to hearing the Minister's answers.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip 5:16, 22 June 2005

My Lords, I thank the noble Baroness, Lady Noakes, and the noble Lord, Lord Oakeshott of Seagrove Bay, for their input. I shall start by putting the matter in context. There was a lot of criticism in the reports, and it has been repeated from the Benches opposite and in another place. However, the tax credit system introduced by the Government has had a profound and beneficial impact on the lives of many families, helping to lift their children out of poverty, making work pay and supporting families. We ought to hear a little more about that, alongside the criticism.

The noble Baroness, Lady Noakes, raised several points, and I shall try to deal with each of them. Should we apologise? Absolutely not; we have nothing to apologise for about the tax credit system. It has had a profound impact on the lives of many. There are challenges in its introduction; those have been recognised, and steps are already being taken to address them.

Photo of Baroness Noakes Baroness Noakes Spokespersons In the Lords, Treasury, Spokespersons In the Lords, Work & Pensions & Welfare Reform

My Lords, could the Minister say what the error rate would have to be, before the Government would apologise?

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, I shall deal with the point about the error rate. The statistic that is quoted is misleading. The suggestion that overpayments are inevitably an error is a misunderstanding of what is happening in the system. It is a responsive system, which means that, if the income of a family goes up during the year by more than £2,500, there is the prospect of an overpayment. That is a consequence of the way in which the system works; it is not, in those terms, an error. The issue is how we encourage people to report changes more effectively, so that those changes can be reflected more quickly in the payments that they get. We need to see that in context.

A fundamental issue is the assertion that is made about financial instability. It goes to the heart of the way in which tax credits are constructed. It was debated extensively in another place, and the majority there was very clear about what it wanted. The CAB, which was consulted at the time, wanted a system that was responsive and flexible and took account of changes for families during the year. I ask those on the Conservative and Liberal Democrat Benches whether they want to pull all that back and go for an inflexible, fixed, flat system that is not fair to families and does not adjust to reflect family circumstances during the year.

A question was asked about the 800,000 families that are due to be transferred into the system. As my right honourable friend in another place explained a short while ago, the plan is still to transfer them into the system by the end of the year. We will monitor the system continuously this year to make sure that the transfer can be done safely and will report to the other place if there are any changes in the plan. I am happy to make the same assurance to your Lordships' House.

The issue of hardship was raised. Of course there is sympathy for families that end up having to deal with repayments. But in the code of conduct and procedures of HMRC there are processes to protect people. Those need to be reviewed, and that is one of the undertakings given by my right honourable friend. HMRC paid out £170 million in 2003–04 to mitigate hardship.

On the issue of whether the system is too complicated, in its first year of operation—2003–04—the take-up of child tax credit was about 80 per cent, which is better than the take-up on family tax credit. As I said earlier, 6 million families are benefiting. That seems to me to show an understanding of the system.

On the ability of people to spot overpayments, they do not have to understand how the system technically works. The key to it is the data that are provided when the award is made; that is, the size of the family and the family income. Those items should be easy to spot. Nevertheless, one of the undertakings given by the Paymaster General is to review award notices to see whether they can be improved to help communication. Indeed, the noble Lord, Lord Oakeshott, asked whether we accept the issue about increased and better communication. The answer to that is "Yes". It was dealt with in the Statement made on 26 May. That must be carried through.

On the issue of over-optimistic assurances, it may well be the case that they were over-optimistic. But as a greater understanding of how things are working in practice has developed, the Government have looked at the issue speedily and have responded.

On the issue of whether heads will roll for this, the politicians involved have fully accounted for themselves in another place as the matter has developed. What happens to employees of HMRC is an internal matter for that department.

All of the administrative issues raised in the ombudsman's 12 recommendations had already been covered in the Statement of 26 May, and they are being tackled. There were recommendations in respect of writing off overpayments caused by official error. They will be written off if they are the result of official error, as long as it is reasonable for the claimant to believe the payments to be accurate and appropriate.

The recommendation to set in-year recovery rates at the same level as those for previous years is not accepted. This is part of the balance of how we deal with recoveries of genuine overpayments. The problem is that if recovery rates are limited in-year they are stacked up in subsequent years, and life is no easier down the track.

The issue of suspension of over-payments in official error cases has been taken up. It has been announced that when there is a dispute the process of recovery will be suspended until it has been resolved.

I think that covers pretty much all of the recommendations that were made. Crucially, most of the issues raised in the recommendations were already being dealt with as a result of the Statement of 26 May.

Other questions were asked. I cannot reasonably comment on the matter of the contractor, EDS, and the Identity Card Bill, and I am not sure that the noble Lord would expect me to do so. I cannot give the House an answer about the outcome of the discussions with our former IT partner, but I shall see that noble Lords are written to on that subject so that they can be sure about what is happening.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, the noble Baroness, Lady Noakes, referred to EDS and I can confirm that it was the former IT partner.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, I shall give you an answer to that question shortly. It is Cap Gemini.

I have already dealt with the question of writing off in cases of official error. It will be done if the claimant reasonably believed that the payment was appropriate.

We accept the issue about communicating errors and mistakes to claimants. That is being dealt with as part of trying to improve the nature of communications so that people are more fairly alerted.

I believe that I have covered all the points raised, except for the matter of negotiations with EDS, about which I shall write to noble Lords, but doubtless noble Lords will prompt me if I have not.

Photo of Lord Barnett Lord Barnett Labour 5:27, 22 June 2005

My Lords, I declare a past interest as I made a modest living from complex tax systems and an even more modest living from introducing them as Chief Secretary to the Treasury.

These are two serious reports. I know that my noble friend will not have underestimated the serious criticisms within them. I understand from what has been said that the Treasury and the Inland Revenue—although we must now refer to it in a different way as HMRC—are looking into these major problems. But if able and successful businessmen found the tax system very complex, even when they were advised so well by professionals, how difficult must millions of the very lowest paid people who have no benefits advice at all find it?

It is not surprising that the computer system could not cope with the system. Indeed, I have problems with just one computer, so I understand that there were problems there. On the other hand, reading these reports, if one is not careful one can lose track of the objective, which is to help the lowest paid people in the land. In fairness, I am bound to say that I have not heard any alternative proposal from the noble Baroness, Lady Noakes, or the noble Lord, Lord Oakeshott, that would help the lowest paid in the land.

Some of the lowest paid are clearly not benefiting from the system. They are not only not benefiting but are suffering from the way that it is operated. We must recognise that. I know from what the Minister has said, and from what my right honourable friend in another place said, that the Government recognise the difficulties that have arisen. I am pleased to hear that the Treasury has agreed and the Paymaster General has instructed the Revenue to suspend the reduction of income where there is a dispute. It is not enough just to do that in the case of a dispute. Many of the people we are talking about do not even know that there is a dispute. It needs to be more carefully handled.

I know that there is a helpline, but most of these people do not know how to press buttons one, two, three and four, which you are usually told to do when ringing a helpline. It is important that there should be greater understanding, sympathy and care in the Revenue departments for the people concerned. It is no use saying, "We should sack the people who handled this". They were handling complex issues, and making party political points is not helpful to the people concerned.

One of the major recommendations of the Citizens Advice Bureaux report is that all adjustments to payments should be limited to ensure that claimants cannot be left with weekly incomes below minimum levels. That is an important recommendation. Will my noble friend say that that has been accepted and that the Revenue will be told that that must apply? We are dealing with people on the very lowest level of income. We do not want to see that made worse rather than better, which is the objective of the scheme.

Of course, I appreciate that where there has been overpayment there is a case—I am glad that the Government have accepted it—for writing some of it off where serious administrative errors have been made by the Revenue. However, one has to recognise that we are dealing with many hundreds of millions of pounds of overpayment. Before we start writing off public money in that way, the Government have to be very careful that it is being written off in appropriate cases.

As I say, and as we all know, the tax system is complex. Normally, it is in one year that a tax adjustment is made. If that happens, people with low levels of income can be forced to repay sums in a very short space of time. I would like an assurance from my noble friend that even though repayment may have to be spread over a longer period of time, it will be so spread in order to help the very people that we are trying to help.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, I thank my noble friend for his questions. In relation to simplicity or complexity, in any construct of a tax system or a benefits system, there is always a challenge between getting things fair and making them simple. As regards the ability of, or the requirement for, people to understand the calculation, it is not necessary to understand precisely how the calculation works. It is important for people to understand the factors on which the calculation is based—family size, and so forth. The need to demonstrate and communicate that better has been recognised so that the components of the calculation are clearer. It is not beyond the capacity of most people to know the family income, the number of children and the composition of the household.

Nor do I think that we should accept that the computer systems cannot cope with those arrangements. Clearly, there were failures at the start of the process which have now been addressed, and the system is now stable. If computer systems cannot cope with this, what sort of technological world are we living in?

Recovery is important. For those recoveries that are made after the end of the year, the current code of practice says that no more than 10 per cent of the award can be deducted when people are on the maximum benefit. That increases to 100 per cent when people are on the minimum benefit. When people are in the taper, it is 25 per cent. There are more difficult concerns, which are recognised, when an overpayment is spotted during the year. Rather like the pay-as-you-earn system, the computer works to recover that immediately. But there are mechanisms in place to identify hardship and for there to be a reduction in what is claimed during the year.

With regard to suspension of recoveries until there is a positive act of the claimant to challenge, there is a balance between what is fair to taxpayers in general and what is the right construct for a system of this nature. Where there is a dispute and a recognised error, the process can be halted, but not in every case. If a recovery or an overpayment has been identified, processes to recover it, provided that they are fair, ought to proceed as a natural part of the system.

Photo of The Earl of Northesk The Earl of Northesk Conservative

My Lords, is it not the case that Ministers were somewhat selective in their presentation of the November 2002 Gateway Review of the tax credits IT system, highlighting such comments as the project being,

"an exemplar of good programme management"?

But is it not also the case that the Gateway Review emphasised that the project was high risk? To what extent at the time did Ministers factor that into its development? Is it not also the case that by November 2003, Nick Montague, then chairman of the Inland Revenue, in evidence to the Public Accounts Committee, blamed the tax credits fiasco on a failure of the systems? Is it not surprising that, in a year, what the Government had chosen to describe as,

"an exemplar of good programme management", had become the villain of the piece?

Moreover, the Statement implies that this sorry mess is just a little local difficulty that can be ironed out with a bit of tinkering round the edges. But are not the problems very much deeper and wider than that? For example, is it not the case, as revealed by Steve Lamey, chief information officer and a board director at HMRC, that the department sends about 30 million letters to wrong addresses each year, or that each of 72 tax offices process self-assessment forms in different ways? Even on separate floors within a single tax office there are sometimes different processes.

Against that background, should not Ministers be a little less complacent and face the fact that, as Computer Weekly put it, the Revenue is riddled with "systemic failures"? Is it not time for a little humble pie—perhaps, even, as my noble friend Lady Noakes has suggested, an apology or two?

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, the noble Earl, Lord Northesk, raises a number of interesting points, but forgive me if I cannot immediately give a detailed answer to all of them. There was a wholly unexpected failure of the IT system, but that does not mean that the programme was badly managed overall. I do not believe that the Government have been complacent in the failures in the system. They have addressed it and have changed IT partners, as we discussed earlier. The system is now stable. Making sure that it remains so is an important part of the policy going forward.