Tax Credit System (Angus)

– in Westminster Hall at 1:00 pm on 16th May 2006.

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Photo of Michael Weir Michael Weir Shadow Spokesperson (Work and Pensions), Shadow Spokesperson (Trade and Industry) 1:00 pm, 16th May 2006

I am pleased to appear for the first time under your distinguished chairmanship, Mr. Williams, and I am sure that this will be the first of many such occasions. I should say at the outset that the debate is not about the effectiveness or desirability of tax credits but about the way in which the system that is used to calculate and deliver them fails many of my constituents. Although I shall be referring to specific cases, they illustrate a general problem with the tax credits system.

In my first term in Parliament, by far and away the most complaints that I received concerned the Child Support Agency, and no one was at all surprised when the Government effectively threw in the towel, conceded that the agency was unworkable and ordered a redesign. Sadly, over the past two years, the number of complaints about tax credits has risen substantially and now rivals the number of complaints about the CSA. Unless the Government take urgent action to tackle the problems, they will simply multiply, and we will end up in the same situation as we did with the ill-fated CSA. Several constituents have told me that they are so dispirited and worn down by the problems that they have encountered that they will no longer claim tax credits, even though they are entitled to them. That is a terrible indictment of a system that is supposed to help those who are most in need.

The problems that I shall describe affect constituents across my constituency and, I assume, across much of the rest of the country. The first case that I want to bring to hon. Members' attention is that of Katie Adamson, from Forfar, who first came to my office in December 2005. She applied for child tax credit first as a single claimant and then jointly with Anthony O'Hare. Her problems began with the annual review in September 2005, when she received a letter asking whether there were any changes in her circumstances. There were not, so she phoned the department, and the person she spoke to told her that she could send the form back blank or not send it back, because confirmation that there had been no changes had, in effect, been recorded as a result of her call. Being a cautious and sensible young woman, however, she sent the form back anyway.

Soon afterwards, Katie received a letter from the tax credits office informing her that it had heard nothing further regarding changes in her circumstances, so her tax credit would be stopped. At that point, she contacted the citizens advice bureau. The tax credits office told the bureau that it acknowledged the error and would recommence the payments. It may come as no great surprise, however, to hear that that did not happen, and that brings us to the crux of many of the problems with the system. As MPs, we contact the tax credit hotline or the tax credits office, and those involved acknowledge that a mistake has been made, but they seem incapable of rectifying it, because of the computer system that they operate. In many cases, we seem to have slipped into the "Little Britain" sketch in which the computer says no, and that is it.

To return to the long-suffering Katie, however, nothing happened for 11 weeks, and the arrears accumulated. The computer system was blamed for the problem, although, to be fair, the department agreed to make a manual payment for four weeks. However, Katie had to make a 40-mile round trip to Dundee, at a not inconsiderable cost, to collect it, and she received nothing further after that. After she contacted my office, we contacted the technical department and were assured that the error had been sorted out and that payments would be made to her bank account as normal. Bizarrely, however, she was then told that she would receive the full arrears for 11 weeks, but that she would have to pay back the four weeks that she had received as a manual payment in the interim. Quite how that was a sensible way to deal with the situation escapes me.

Finally, my office managed to secure arrears payments of £224.94 for Katie. Even then, however, we noticed that she was still due £85.96, so we contacted the department again to point that out. It accepted that there was an error and agreed to forward the arrears, but nothing has been received to date. That was bad enough, but at least Katie had got through the maze and got most of the money that she was due. However, nothing about the tax credit system is quite as simple as that. She and her partner Tony then received three award letters on the same day.

The first letter related to Katie's single claim prior to December 2005 and claimed an overpayment of £1,383.12. The tax credits office has since agreed that that was sent in error. The second notice claimed an overpayment of £224.92. Yet that related to the period for which it had already been agreed that a payment of £85.96 remained due to her. That contradicted what she had previously been told. The last letter referred to the new tax year, 2006-07. However, a portion of the overpayment referred to in the previous letter had been deducted wrongly from the award. We are still chasing the office about that. I do not know whether hon. Members can follow those complications, but I am sure that they can begin to appreciate the "Little Britain" sketch.

Worse still, the tax credits office claimed an overpayment of £1,210.20 for the tax year 2004-05. My office raised that several times, until the tax credits office finally responded that there was no record of any overpayments for that year, but repeated the claim that there was an overpayment of £1,383.12 for 2005-06. That was the sum that it had previously agreed in writing was an error. It was going back and claiming something that it had already said was not due.

This is just one case, but it is a complete mess and it illustrates a problem. Both my constituent and my office have been told one thing, only to receive correspondence totally at odds with the verbal advice and sometimes at odds with previous written advice. The computer gets the blame, but is there no point at which human interventions in the system can stop cases spiralling out of control and creating havoc for people like Katie Adamson?

If the case were an isolated one, I should put it down to bad luck, but it is far too general a problem. Ishall briefly note a few points about other cases. Another Forfar constituent—Forfar seems particularly unfortunate in experiencing such cases—faced a claim for more than £10,000. The couple had made an application and received an award. Before it was paid, the husband was paid off, but quickly got another job at a reduced income. They received a letter telling them how much they would be paid, which they queried, saying that they thought it was incorrect; but they were assured that it was correct.

Eventually, when the inevitable happened and money was reclaimed from them, they were told that the problem was that their two children had been input into the computer system twice. They appealed on that basis, only to discover later that the real reason was that the wrong income had been entered on the computer. Part of the problem appears to have been that the couple never received a formal award notice after the change of job setting out how the amount was calculated, but the tax credits office refuses to accept that.

I can do no better than to quote a paragraph from a letter from my constituent:

"I still get the impression, from the person I spoke to, that the only way they will reconsider the matter is for me to prove that I did not receive a proper award notice, which is impossible. She said that the computer showed an award notice was sent and that would be correct—she could not answer when I asked whether their computer showing that I worked forty hours a week for nil pounds while claiming for child care would be correct too."

Again, the computer says no. That seems to be the crux of the problem. The department relies on the computer absolutely, but will not consider that it could be wrong. It reminds me of the constituent who repeatedly questioned the amount that was awarded, and was assured that it was right. When, inevitably, a repayment was claimed, she received a letter saying that although she had been assured that it was correct, it was not reasonable for her to accept that. What definition of "reasonable" does the department use?

Yet another Forfar constituent had been receiving working tax credit since 2003. In October 2005 she was told that she was no longer entitled to it, and a repayment of £1,200 was demanded. That was queried and the office agreed that it was a mistake and that she was still entitled to working tax credit. However, no payments were made in November, which left her very worried. When she contacted my office we contacted the department, which again pleaded computer error and promised manual payments. A manual payment was made in December, but in the same month she received three applications to complete and two demand letters, one for £1,000 and one for £700. She went to the Dundee office and was advised to appeal on both demands. She was then also told that the computer had now ended her claim—the computer seemed to be dealing with things all by itself.

My office contacted the tax credits office and received a letter in response that was totally incomprehensible. I am a lawyer, and I could not understand what it said, so we contacted the tax credits office. Surprise surprise, it could not understand the letter either, even though it had sent it out. Perhaps the computer had moved on to composing the letters as well.

In early March, the department promised to cease sending demand notices and to try to resolve the problem. Thankfully, for once, no more notices have been received but there has been no resolution either. That lady is still not receiving the money to which she is entitled. The case is unacceptable, and it has left this lady in worry. I wrote to one of the Minister's colleagues on 3 April, but I await a response.

It is not just the people who have come to see me in my office who are having problems. After I secured the debate, Arbroath citizen's advice bureau—we have left Forfar, for a change—contacted me and brought to my attention a case that it was dealing with. A young couple had received an overpayment demand for more than £19,000 for the period between 2003 and 2005. On 7 November 2005, the CAB wrote to the Department and said:

"Please treat this case as a matter of urgency as it is having a major impact on the well being of our clients as well as creating a crisis in their ability to manage their finances."

The department asked for a copy of the original application, which had been made online and of which the constituent had no copy, although I appreciate that that system has been changed in the interim. No response was received until April of this year, when the constituent received another demand notice. The CAB wrote again on 10 April, and made a formal complaint. It has now received an acknowledgement and a promise of a full reply, but that came only after a formal complaint was made. It is simply not good enough that it has taken six months from when the original application was made to reach that stage.

Even this morning, I got yet another letter. A constituent had come to my office who had been chased for a repayment. The tax credits officer said that the payments had been made to their employer, but the employer denies that any such payments have been made. The letter states that due to technical difficulties the office is unable to bring my constituent's records up to date. Again, the computer is unable to deal with it.

It seems to me that the problem is that the system is too complex and relies on a computer system that is not up to the task. There appears to be no process that allows human intervention to deal with a problem once it occurs. The demands keep coming, irrespective of what is said to me or to anyone else. Even when it is agreed that manual payments will be made and the person goes to collect them, the situation is not resolved, the computer does not deal with it and there seems to be no way to break into the cycle of the computer program. That is exacerbated further by the forms and letters, which are very difficult to understand. As I say, I am a lawyer and I find them difficult. Many of my constituents, who are far from being lawyers, simply cannot follow the information that is given to them.

The time frame for dealing with cases often means that people are trying to reconstruct information from a number of years with little written information from the applicant, but a mountain of often contradictory information from the department. As I said at the outset, it seems that the complaints about tax credits are now rivalling those about the Child Support Agency. I appeal to the Minister to consider the problem seriously. I am sure that he will tell me that tax credits are a good thing, and are helping a lot of people. I am not here to dispute that or agree with it. I am here to ask about the system, in particular the computer system that seems to have a will of its own in dealing with my constituents. Unless the problem is tackled now, things will continue to deteriorate until, like the CSA, the tax credit system cannot continue. I appeal to the Minister to deal with the matter now, and to tackle that dreadful computer system.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury 1:15 pm, 16th May 2006

I begin by welcoming this debate, which is the first that I have answered as Chief Secretary. I am grateful to Mr. Weir for raising the topic and for his interest in and concern about the tax credit system. The debate is focused on Scotland, and the hon. Gentleman gave a number of examples of the unhappy experience of some people in Angus. However, it raises United Kingdom-wide tax credit policy issues. Alongside child benefit, the tax credit system now delivers significant financial support to the vast majority of families with children in the UK.

I shall not even begin to attempt to defend the unhappy sagas described by the hon. Gentleman. He named Katie Adamson, but he did not name the individual concerned in the second case.

Photo of Michael Weir Michael Weir Shadow Spokesperson (Work and Pensions), Shadow Spokesperson (Trade and Industry)

I specifically asked Katie Adamson whether I could name her, because of the complexities of her case; for obvious reasons, other constituents preferred anonymity. However, I am happy to givefull details to the Minister if he wants to look into them.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

I would be grateful if the hon. Gentleman did so, because I shall certainly want to take up those cases with officials.

As the hon. Gentleman anticipated, I want to tell the Chamber that we must not lose sight of what has been achieved through the tax credit system. It has beenvital in two important areas. First, it has reduced the extent of child poverty; and, secondly, it has made work pay.

The system provides financial support, which is worth more than £15 billion this year, to nearly 20 million people. In Scotland, it is worth about £1.5 billion; and in the hon. Gentleman's constituency last month, 7,100 families benefited from tax credits, including 10,900 children. The hon. Gentleman is right to highlight the problems faced by some of his constituents, although they form only a small proportion of the 7,100 families who benefit from the system.

The hon. Gentleman has raised 10 cases this year in which people have had a problem with tax credits, and I readily concede that it would have been much better if he had not had to raise any. My right hon. Friend the Paymaster General and I will be happy to look at the cases that he has referred to today, but I hope that he will acknowledge how much the tax credit system is delivering to a large number of families in his constituency.

We have set a target—I am sure that the hon. Gentleman supports it—to eliminate child poverty within a generation. Tax credits have helped lift some 700,000 children out of relative poverty since 1997, including 80,000 in Scotland, which is broadly in line with the milestone that we set to reduce the number by a quarter by last year. The UNICEF report "Child Poverty in Rich Countries 2005" states:

"The proportion of children living in poverty has risen in a majority of the world's developed economies."

However, it says that there are exceptions, and the country achieving the biggest reduction in that proportion has been the UK. It points out:

"Until the late 1990s, the United Kingdom had one of the highest child poverty rates in the OECD."

It then says that

"over the last six years, the UK government has pioneered an approach to the monitoring and reduction of child poverty that seems to be working."

The tax credit system has been key to that success.

For a family with two children on half average earnings, the tax credit system provides £4,400 a year. The least well-off can now receive up to £107 a week, compared with just £20 per week in 1997; and the number of people receiving tax credits is seven times higher than the number of those who received family credit.

Photo of Michael Weir Michael Weir Shadow Spokesperson (Work and Pensions), Shadow Spokesperson (Trade and Industry)

As I said at the outset, I am not here to criticise or agree with tax credits; it is the system that bothers me. Although I appreciate what the Minister says, does he not accept that, if constituents are telling me that they are no longer prepared to go through the hassle of claiming tax credit because of the situation that they find themselves in, something is wrong and that a simplified system is needed to deal with the problem?

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

I am hoping that the hon. Gentleman will acknowledge the strengths of the system. He takes a neutral view that perhaps it is a good thing but perhaps it is not.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

That is what I understood. I would be happy to give way again in a moment, but it is important in the backdrop to this debate to set out why the system was introduced, why it has the characteristics that it has and what a great deal has been achieved through it, including for more than 7,000 families in his constituency.

I accept that the system ought to work smoothly and that the problems to which the hon. Gentleman rightly drew attention must be put right. We have made several changes. Last year, my right hon. Friend the Paymaster General made some announcements which I shall outline in a moment. They started to take effect from last month and will continue progressively to take effect in the coming year. I hope that in the hon. Gentleman's constituency they will tackle effectively the kind of problems that he described.

I do not for a moment want to gloss over the problems that he described or pretend that they do not exist. I know that there are significant problems exactly along the lines that he described. However, I should point out, first, that the system has achieved a great deal and, secondly, that we are on the case. I hope that he will detect over the coming weeks that we are putting right the problems that he drew to our attention.

The tax credit system has had a big impact in reducing child poverty. Take-up has been high from the start—much higher than for predecessor income-related benefits. The system has also had a big impact in helping to make work pay. Together with the national minimum wage, it can guarantee a minimum level of income for people moving into employment, thereby helping to ensure that work pays over welfare. For example, a lone parent with two children moving into full-time work on the national minimum wage will have an income gain from working that is 40 per cent. greater in real terms than would have been the case in 1997. That contributes to stability in the economy and has helped to increase the number of people in work by 2.3 million to the historically high levels of employment that are such a positive feature of the UK economy today.

As I said, it is certainly not my intention to gloss over the serious difficulties that the hon. Gentleman highlighted. The system is complex and has to be because of the complexity of people's lives. Every year, 3 million people change jobs, and 200,000 men and women move into new or better jobs and raise their family income by more than £10,000. We need a system that reflects that and that can support people as they move between jobs and change their circumstances, and that is what we have designed the system to do.

Overpayments, which the hon. Gentleman mentioned, are a consequence of a responsive system. Under an annual system, given that a family's final entitlement cannot be known until the end of the year, we have to be able to make end-of-year adjustments. We can avoid that only with an entirely inflexible fixed system that would not offer the flexible support that is such a valuable feature of the present system.

Photo of Michael Weir Michael Weir Shadow Spokesperson (Work and Pensions), Shadow Spokesperson (Trade and Industry)

I understand what the Minister is saying, and I do not dispute much of it, but does he not accept that if the system is to be responsive, it is vital that notified changes are correctly put in the computer and that the computer is able to deal with them? From the cases that I have come across, it appears that that is not happening. Either the information is wrongly inputted—perhaps it is not inputted—or the computer does not react to it. In some cases, it does not seem to be able to take on board the changes that are given to it. That is a serious drawback to the system.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

I completely agree with the hon. Gentleman. The system should not fail to work because of that, and we have made some important improvements to tackle the problems. This is the first time that I have had the opportunity to look in detail at it, but the incidence of problems is limited, as far as I can see. There are 10 too many problems in his constituency, but that is 10 out of 7,100. It is not the normal experience of people who send in information about a change of circumstances that the system fails to register it. I agree that no one should have that experience and that too many do at present, but they are a small proportion of the total and I hope that it will get smaller over the coming months.

We have made changes. From last month, the disregard for income increases between one tax year and the next has risen from £2,500 to £25,000. Almost all families with rising incomes will not have their tax credit entitlement reduced in the first year in which the increase occurs. We believe that that will lead to a big fall in the number of overpayments. Other changes will be introduced in the coming months.

The aim is to provide more certainty for tax credit recipients—the hon. Gentleman's constituents—particularly for families who see a rise in income, and to keep the benefits of the system's flexibility to respond to falls in income and changes in circumstances. We estimate that overpayments will be reduced by around one third. Families will have a clear responsibility to report changes promptly and will be helped to keep their records up to date. Her Majesty's Revenue and Customs will take a more proactive approach.

There have been significant further improvements in our administration systems. With effect from last month, a new award notice is being issued to give claimants a clearer summary of their award, explaining how it was calculated and what they will be paid. I hope that that will help people in the circumstances described by the hon. Gentleman. The guidance notes that accompany claim forms have been replaced with a clearer, shorter version. The tax credit section of the Revenue and Customs website has been redesigned to make it easier to access information.

Since the beginning of the year, there has been a publicity campaign reminding people to notify us promptly of changes in their circumstances. The helpline, which dealt with 22 million calls in 2004-05, has been improved. Call-back arrangements providing more targeted, fuller support in the most complex cases are now in place, and I hope that the hon. Gentleman's constituents will see improvements as a result. Major software releases were successfully implemented in November last year and again last month and are delivering real improvements in operational performance. Again, I hope that that will directly address the concerns that the hon. Gentleman expressed. New procedures to suspend recovery of a disputed overpayment were also introduced last November and we published a revised and clearer version of HMRC's code of practice on overpayments. I hope that that will also help.

I know that hon. Members on both sides of the House have appreciated the willingness of my right hon. Friend the Paymaster General—who is out of the country on ministerial business today—to meet hon. Members about the problems that we have had, to assist in resolving them and to make changes to put them right.

Today, tax credits are helping millions of families throughout Scotland and the UK. We are determined to improve the system further, to remedy the defects that have affected a minority of tax credit recipients in the way outlined by the hon. Gentleman today. We want to give families more certainty about their tax credit awards, but we want to hang on to the crucial ability that characterises the current system of being able to respond to changing circumstances.

I am grateful to the hon. Gentleman for setting out on behalf of his constituents their wholly proper concerns and for helping us to ensure that the system provides the help that it was designed to provide. I hope that over the next few weeks or months he will notice the significant improvements that are being made to the administration of the system and that the incidence of the problems that he described will become significantly less frequent than in the past few months.

Finally, I note that we received a helpful and interesting brief from the National Council for One Parent Families to coincide with the debate. It made a number of points rightly emphasising that there is more to be done to ensure that the system delivers what we want it to. It started by welcoming the fact that the Government have listened to concerns about the operation of the tax credit system and that we are introducing changes that should improve income stability for claimants and reduce hardship. That is our aim and I hope that we will be successful.