Tax Credit Overpayments (Edinburgh)

– in Westminster Hall at 1:00 pm on 2nd May 2006.

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Photo of John Barrett John Barrett Shadow Minister, Scotland 1:00 pm, 2nd May 2006

I am delighted to have secured this debate at what is an opportune moment, with the latest report from the Public Accounts Committee hot off the press and the latest figures for overpayments due for publication in the coming weeks. Now is an ideal time to reflect on the current state of the tax credit system and the scale of the problem. I am also delighted to see the Paymaster General in her place. She has met me and other hon. Members to discuss the issue, and I appreciate the seriousness both with which she takes the suggestions that are put to her and with which her office has done its work.

Hardly a week goes by without a constituent turning up at my advice surgery having experienced problems with tax credits. Later I shall highlight just three such cases, but there are many more in my constituency and the rest of the city. Each case has caused financial hardship for the individual or family concerned, many of whom live on a tight budget and who have given the tax credit office the correct information and on time.

Central to my remarks is my view that if a constituent has supplied all the information requested on time and informed the tax credit office of any changes of circumstance, it is reasonable for them to assume that the calculation by the department would be correct. The cases that I intend to highlight are examples of where all information had been given and yet the tax credit office still insisted on repayment. That injustice must not be allowed to continue.

I am sure that many hon. Members agreed with last week's report of the Public Accounts Committee, which condemned as deplorable the fact that thousands of already hard-pressed families will have to pay back money because of Revenue mistakes. We are talking about almost £1.9 million in overpayments and £700,000 in underpayments, out of £5.7 million in awards. That is an enormous problem rate, especially when it comes to clawing back overpayments and paying out underpayments.

The situation in Edinburgh broadly reflects the national picture. The latest figures show that almost 30,000 people across Edinburgh are in receipt of tax credits. The figures for 2003–04 show that almost 32 per cent. of tax credit awards in Edinburgh were overpaid. That left 9,800 families in the city being forced to repay an average of £1,020 each. It is no secret that a similar level of overpayments for 2004–05 is widely anticipated. It is for that reason that today's debate is so important.

I would not suggest that the tax credit system has not made an important contribution, either in providing work incentives or in reducing poverty, but this debate is about the thousands of people across Edinburgh, some in real poverty, whose situation is being made much worse by a systemic failure that the Government must address. The adopted system of annual assessment was inevitably going to lead to some overpayment and underpayment of tax credits, but it is now clear that the Government grossly underestimated the scale on which the problem would occur. I am sure that hon. Members are familiar with the figures, but it is worth reminding ourselves of the sheer size of the error.

In 2003–04, Her Majesty's Revenue and Customs paid out around £15.8 billion in child and working tax credits to 5 million families, and paid out a similar amount in the following year. In each year, around £2.2 billion was overpaid to about 1.9 million families. That was more than double the amount expected when the system was initially set up. Government oversight on such a scale has contributed to the current inability of the system to cope with the magnitude of the problem that we now face.

Without doubt, part of the problem can be traced to the complexity of the system. Often it seems so obscure that it can baffle even the experts. Far too often no explanation is given for an overpayment and the chance of getting through to someone on the helpline has, for many, seemed nigh-on impossible. Figures show that there have been millions of unanswered calls to Government helplines. That must be addressed.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I do not diminish at all the points that the hon. Gentleman wishes to make about his constituents, but I remind him that figures that he quoted on difficulties getting through to the helpline are from 2003—the first few months of the tax credit computer. We have never disputed the fact that there were problems, but the helpline has improved considerably. Most people get through on the day and I would be grateful if the hon. Gentleman acknowledged that.

Photo of John Barrett John Barrett Shadow Minister, Scotland

I am certainly glad to acknowledge that. I am delighted when access to a helpline is improved, not only for hon. Members but for our constituents. I take the point that the Paymaster General makes and welcome all improvements.

While the complexity of the system is undoubtedly leading to a high incidence of error, there is also a danger that vulnerable claimants, such as elderly pensioners, could be put off from taking up benefits by what they perceive as a wall of complicated forms and impenetrable jargon. Newspaper headlines revealing massive benefit clawbacks are hardly the best encouragement for those thinking of applying. I look forward to hearing the Paymaster General's comments on that.

I should like to qualify my remarks. I do not suggest that the Government are responsible for every overpayment or underpayment in the system. I entirely agree that, if an individual fails to inform Her Majesty's Revenue and Customs of changes in circumstance or has made an attempt to hide or embellish information, it is only right that the Government should reclaim any amount overpaid. However, in too many instances mistakes have been caused by official error. It is in that context that the Government have acted entirely improperly and in which I look forward to hearing the Paymaster General's views.

If constituents of mine have been open and honest in their dealings with the tax credit office and yet internal mistakes have led to an overpayment, it is unacceptable to demand large amounts of money back from people who reasonably assumed that the Government would get their sums right. It is nothing short of outrageous that decent, honest, hard-working people are forced into financial hardship as a direct result of incompetence in the system. Such people are not premiership footballers who can have a few weeks' wages deducted with no adverse effects. Many tax credit recipients budget from week to week and cannot afford to have their payments halted or to pay back large sums of money that have already been spent. I appreciate that the Government have made some progress in that regard, making provisions, I understand, to write off debts worth around £1 billion for those who would suffer extreme hardship as a result. Nevertheless, they have an obligation to do more. I should like them to take a leaf out of the Australian book by admitting to their mistakes, wiping the slate clean and writing off all overpayment debts resulting from official error.

The effect of the Government's policy is that a constituent of mine who has been overpaid through no fault of their own and entirely through the incompetence of the Revenue will have that money reclaimed by the Government. That constituent will then have to try to stop the reclaim. One example is Mrs. Pauline Duff, who contacted me a while ago. She and her new partner moved house from one part of my constituency to the South Gyle area. The tax credit office reassessed the claim and the new amount was half of what it was before. The new assessment was sent to Mrs. Duff at her new address and included her new partner's full details.

In 2005, the tax credit office advised that an overpayment had been made because Mrs. Duff had failed to give details of her change in circumstances. The office claimed that she had failed to inform it of her new address and of the fact that she was living with her partner. However, the letter was sent to her new address and contained all the details of her partner, so that explanation did not stand up to scrutiny. A small payment of £85 in compensation has been made to Mrs. Duff for errors and delays on the part of the Tax Credit Office, but it is insisting on reclaiming from her overpayments of £4,517, which she cannot afford. That is entirely wrong and unfair.

The second example is of Mr. Terence Dwyer, who became unemployed in 2003. Later that year he was successful in getting a part-time job, and then moved to a full-time job. His partner, who was then a housewife, started work as a home help for Edinburgh city council, where she remains today. They informed the tax credit office of her rate of pay, number of hours and relevant details, as well as of his rate of pay, working hours and relevant details. The tax credit office later advised that owing to a computer glitch it had assessed the claim on the wrong figures of joint income, despite Mr. Dwyer giving all the correct information. The glitch meant an overpayment to Mr. Dwyer of £1,423. He has asked the tax credit office for a breakdown of the calculations, but none was forthcoming. The office has stated in no uncertain terms that it will require all the money back. It is that fundamental unreasonableness at the heart of the system that is causing so many problems.

A third case is that of Mrs. Mowat, a widow with four children. In July 2004, the tax credit office advised her that her award was £2,249. She had previously written to advise it that her second youngest child had just left school. In late 2004, she received a second notice to say that for the same period the amount that she was entitled to would be reduced to £1,585. She made numerous telephone calls to the tax credit office and was finally promised that the system would be rectified to show the correct date of the child's leaving school. She received an award notice in 2005, which said that she had been underpaid tax credits. In November 2005, she received the form "Request to reconsider recovery of tax credits", which she filled out and returned in December 2005. No reply has yet been received.

Those are three cases of people providing the details and being absolutely honest, submitting all their changes of circumstances on time. The Government form TC846 states clearly that if the Revenue has

"paid too much tax credit as a result of a mistake we have made and it was reasonable for you to believe we were paying you the correct amount, we will not ask you to pay back the amount overpaid."

The use of the term "reasonable" is the crux of the problem. When constituents such as Mrs. Duff and Mr. Dwyer bring a case to me, they do not think that it is reasonable that they should be expected to be able to work out something on a form that they barely understood. I do not believe that the responsibility to check and correct the Revenue's mistakes should rest with my constituents. A constituent such as Mrs. Mowat, who is claiming child tax credit, should be devoting her time to helping her children with homework, not checking and correcting the mistakes of Revenue officials.

In his last Budget, the Chancellor—who introduced the tax credit schemes—raised the threshold for changes in income that could be disregarded when provisional payments were reassessed from £2,500 to £25,000 in order to improve the situation. I understand that the increase has been made to cut the number of claimants whose entitlements will change when they are annually recalculated. Although the Government believe that the changes could reduce the level of overpayments by as much as a third, nevertheless they do not deal with the unfairness at the heart of the system that I have just documented. What is needed is a fundamental rethink of the benefits system and a move towards a fairer system of fixed awards and clearer award notices.

I have been slightly amused by the way in which the Chancellor has managed to distance himself from recent difficulties in his party, watching troubles unfold from afar in Africa, but he will find it altogether more difficult to avoid the continuing chaos in the tax credit system. Lest we forget his words at the launch of the system, I repeat that he promised that it would help those on the lowest incomes. For a system designed to improve the lot of the worst off, it has been far from an unqualified success. Rarely has tough love been so tough. As my hon. Friend Mr. Laws has said, the Chancellor should not be allowed to escape responsibility for the social and economic costs of the flawed policy. I am sure that the Paymaster General is aware of some of the comments my hon. Friend has made.

Although teething problems are inevitable for any new system, the people of Edinburgh are entitled to expect more in the way of improvements to the system. In the words of the Chairman of the Public Accounts Committee, we find ourselves with a system that has become

"increasingly arcane, unwieldy and baffling both to benefit staff and customers."

I concede that steps have been taken to improve aspects of the problem, such as removing anomalies from housing benefit, but as the Committee put it the improvements have been "rather piecemeal developments" and the lack of objective ways of measuring complexity in the system means that it is difficult to see whether they have had any major effect.

With a Government obsessed by means-testing and targets, it is clear that too many people are being failed by the system. When the Government talk about helping those on the lowest incomes, it is worth remembering that the gap between rich and poor has widened since 1997, with the percentage of the tax burden on the poorest still heavier than that on the best off. If the tax credit system was supposed to reverse that shameful record, it has a long way to go.

Many of my constituents are rightly impatient. They are suffering under the present system and are asking for what the Government have promised in statements. They will accept nothing less.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 1:15 pm, 2nd May 2006

I congratulate John Barrett on securing the debate today at short notice. He raises some important issues. I will deal first with the matters of policy, and say why I could not disagree more with the hon. Gentleman's assessment, and pick up on some of the points about his being inundated. I am not sure where the casework is, if it is not with me. I will then deal with the three cases that he raised, those of Mrs. Duff, Mr. Dwyer and Mrs. Mowat.

First, I remind the hon. Gentleman that the debate, as he rightly says, is in connection with families in Edinburgh who receive tax credits that, with child benefit, deliver financial support to the vast majority of families with children in the UK. They play a vital role in tackling child poverty and helping make work pay.

The hon. Gentleman repeated today, as his party often does, that the gap between rich and poor is becoming greater. That is because they choose to ignore the impact of tax credits. It is convenient to miss out information that does not fit the argument that one would want to advance.

Tax credits provide more than £15 billion support to nearly 20 million people. They play a major role in moving people into work and aid mobility of labour, helping men and women to move up the employment ladder, thus achieving one of the Government's aims of greater employment flexibility. That has happened in Edinburgh as it has in many towns and cities across the country. The policies, combined with economic stability, have helped to increase the number of people in work by 2.3 million. Like the US earned income tax credit, tax credits help people off benefits and into work. When people move into work the flexible tax credit system corresponds to their changes in circumstance. More and more research is coming out that demonstrates that the flexible system of tax credits is infinitely better than a fixed system that is unfair, limited and unjust in that it does not fulfil any of those objectives.

Let us consider the question of fairness, which the hon. Gentleman touched on. As I have said, the real test of fairness is that tax credits tackle family poverty. They have done that, lifting 700,000 children out of relative poverty since 1997 and more than 1.5 million out of absolute poverty, many in his constituency and mine. Tax credits are designed to be inclusive and not to stigmatise people. The hon. Gentleman may remember that the system for those out of work was entirely different from that which applied for those in work; people carried a stigma and had terrible problems in moving from unemployment into paid employment. That has been removed through the tax credits system. It is a progressive universalism; the credits help every family, but some families receive considerably more help, which is important if we are to tackle poverty.

Tax credits introduced a fundamental change to the welfare state. It is an income-related system; in effect, it is a negative tax. However, the hon. Gentleman and his party never take that point on board, nor do they include it in their calculations. The system supports 6 million families and 10 million children, with 360,000 families being helped with child care costs who were never helped under the old system. That compares favourably with the fact that only 800,000 families received family credit. Put another way, more than 19 million people benefit from tax credits. That is seven times the number who received family credit, or nearly one in three of all people.

The hon. Gentleman said that the system puts people off. Let us consider the take-up figures. I do not dispute that there were computer problems in the early months of 2003–04, the scheme's first year; the problems were huge, but I have repeatedly been frank to the House about them. Despite those problems, however, tax credits were at a record level, with take-up at 80 per cent. in the first year of operation. That vastly outstripped family credit, which barely reached the upper 60s in its last year of operation.

For low-income families, the group mentioned by the hon. Gentleman as being unfairly treated, the take-up rate was about 90 per cent., which is higher than any previous income-related system of support for families with children. The figures demonstrate that take-up is not being undermined by the same problems that we saw in the first year. The reverse is true; take-up is rising steadily. That does not show a system in crisis, as the hon. Gentleman asserts; nor is it in chaos.

It is a system to which people are committed and of which they have an understanding, and they know how it benefits them. How did all those people apply if the system was so difficult? The truth is that the questions are straightforward: How many children are there? How much do they earn? Do their partners earn? There are other related questions on child care, and they are asked where they live and whether they will notify us of any change in circumstance. It would be difficult to make it more straightforward and responsive.

We are discussing a typical constituency—the hon. Gentleman's or mine. We are discussing a family with two children on half the average earnings; in today's climate, they would be receiving £4,200 a year more as a result of the tax credits. Indeed, the very poorest can now receive up to £107 a week, compared with £20 in 1997. It is breathtaking that the hon. Gentleman should assert that those families are worse off and that they do not get what they should from the system.

Evidence continues to show that money is going to those families. The evidence is not the Department's, but an independent assessment of the system, and it shows that the money is benefiting the children. As the poorest have seen their incomes rise, they have increased their expenditure on children's clothes and on fruit and vegetables faster than average family spending. That is crucially important; it goes to the heart of the points raised by the hon. Gentleman.

Photo of John Barrett John Barrett Shadow Minister, Scotland

I appreciate much of what the Minister says, but at the heart of the issue is the fact that although constituents have given details accurately and on time, miscalculations have been made. Before she deals with the details of my constituents' cases, I should point out that a number of people have told me of similar cases. For instance, one young constituent told me this weekend that she is having to pay back £900 as a result of a miscalculation; she just accepts that it has to be repaid. Not everyone who has been overpaid and who is having the money clawed back has come to me. However, I have much anecdotal evidence that many people who have suffered such miscalculations are not pursuing the case. They simply accept it.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I was about to deal with the hon. Gentleman's constituency cases, but he questioned take-up of tax credits, he questioned whether the system was helping the poor and he went on about helping those most in need. I felt that I had to respond. I could not leave those assertions on the table and unchallenged. I hope that he appreciates that.

I turn now to the cases raised by the hon. Gentleman, and the anecdotal evidence that he mentioned. I do not see how Governments can plan in response to anecdotal evidence. We have to work on real evidence. He wrote 23 letters to the tax credit office within a year, many of them on the same case. He has written to me on five occasions, and he has telephoned the MPs' hotline 11 times. I know that each of those cases is important and that they need to be dealt with. However, given that there are something like 6,000 families in his constituency in receipt of tax credits, the hon. Gentleman must accept that that does not fit the definition of chaos. To supplement that with anecdotal evidence makes it impossible. I might as well have a crystal ball to help me define policy.

I turn to the cases raised by the hon. Gentleman. He is right about the current policy on overpayment, which people accept. When an overpayment occurs as a result of an official error and it is unreasonable to expect the claimant to have noticed the error—that is, Her Majesty's Revenue and Customs did something with the information on the form that the claimant could not possibly have known about and the claimant attempted to inform HMRC—it has been clearly and repeatedly stated in the House that the reasonableness test and the official error combined will be applied. As the hon. Gentleman acknowledged, if there is real hardship the Department has the discretion to write off the overpayment, to slow down repayments or to supplement income to the family in order to avoid it.

Each of the three cases that the hon. Gentleman cited arose in 2003–04, which I have already acknowledged was a difficult year, and from the information that he gave it is impossible for me to respond on the spot. However, I have some familiarity with the case of Miss Duff, because the hon. Gentleman has written to me about it—he is still awaiting a reply, and I hope to write to him soon—and he has asked a parliamentary question. In the Miss Duff case, I have every sympathy. I have seen HMRC's explanation—there are many points in its favour, such as misunderstandings of what Miss Duff did or did not tell it—but the time lapse needs to be taken into account. I hope to write to the hon. Gentleman within the next few days to confirm that Miss Duff should not be asked to repay her tax credits, as it is not her fault that she was overpaid. I need time to consider the other two cases. I hope that the hon. Gentleman will allow me that.

In conclusion, I am always happy to meet or correspond with any Member of the House, and if there is an injustice in the system I will certainly sort it out. However, I will not give an inch to anyone somehow inferring from one mistake—