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Ombudsman says that HMRC is in danger of getting it wrong on tax credits

PARLIAMENTARY AND HEALTH SERVICE (OMBUDSMAN) News Release issued by The Government News Network on 9 October 2007

In her second special report on tax credits, Tax Credits: Getting it wrong?, published today, the Parliamentary Ombudsman, Ann Abraham, says that despite the considerable improvements which HM Revenue and Customs (HMRC) has made in its administration of tax credits since her last report in 2005, it still has a very long way to go.

Complaints to the Parliamentary Ombudsman about tax credits continue to rise; they currently form more than 26 per cent of all complaints to the Ombudsman. The complaints fall into three key groups: the design of the system; failures in complaints handling; and unfair or unreasonable recovery of overpayments.

Ms Abraham says that the design of the system is a matter for Government and Parliament to consider. However, it was very clear that many people remained unable to grasp the basic principles of an annualised system, and complained about what was effectively the system working as it was intended to.

Overpayments and underpayments are unavoidable aspects of the system which will occur however well it is administered, and the report says that they will therefore continue to generate dissatisfaction and complaints. However, the report also shows the distress which can be caused to some of the most vulnerable families (those on the lowest incomes) when they find themselves with such a debt to repay - often unexpectedly, and sometimes a very long time after the money has been received and spent. Ms Abraham said that this again raised the question of whether the current tax credit system could truly meet the needs of this particular group.

Ms Abraham went on to say that, whilst there had been some improvements in their complaints handling, HMRC was also still failing to take opportunities to get its decisions on complaints right first time. The report shows that HMRC still has a lot of work to do in providing 'fit for purpose' complaints handling arrangements.

However, Ms Abraham's main criticisms in the report are of the application of the guidance, Code of Practice 26 (COP 26), which HMRC uses when deciding whether to waive overpayments. Some 91 per cent of the tax credits complaints referred to the Ombudsman relate to this issue.

Ms Abraham said that the unfair and inconsistent application of COP 26, and the unduly harsh nature of some of the decisions taken on recovery, caused extreme worry and anxiety to many low income families. The outcomes of some of those decisions seemed to fly in the face of the aims of the tax credit policy.

Ms Abraham said today: 'In such instances, the impact on those concerned, typically those on the very lowest incomes who are the most vulnerable in society, is huge and highly distressing. As one complainant put it: "Tax credits are supposed to help families, not cause them money worries." It is essential, therefore, that these matters are addressed as quickly as possible.'

The report features a number of case studies that clearly show how distressing - devastating even - the effects of overpayments can be on some of these families. Indeed, for a number of families their experience was so bad that, regardless of their entitlement, they said that they would never again apply for tax credits.

The report acknowledges that HMRC is currently revising COP 26, which could go some way towards ensuring that more appropriate decisions on the recovery of overpayments are made. However, the Ombudsman said, the proposed revisions will not be enough to deal with all the problems identified in this report or to prevent harsh and unfair decisions in the future.

Tax Credits: Getting it wrong? accordingly makes six recommendations that include a clear and comprehensive guide on the application of the revised COP 26, together with training for staff in its application and the desired outcomes. It also recommends that HMRC develops feedback mechanisms to enable staff to learn from complaints about the unreasonable application of COP 26, and that HMRC ensures that proper consideration is given to the impact of recovery decisions on the individuals and families concerned.

Notes to Editors:

* The Ombudsman investigates complaints about government departments and a range of other public bodies in the UK. She is independent of the Government and the Civil Service. Her services are free and confidential.

* The Ombudsman's first special report on the administration of the tax credits system was Tax Credits: Putting Things Right, HC 124, 21 June 2005, The Stationery Office.

* Code of Practice 26 is the guidance HMRC uses to determine whether to waive overpayments. It applies a 'reasonable belief test' as to whether a complainant could have reasonably thought that their tax credit award was correct.

* Press copies: the Ombudsman's reports are available from the Communications team, Parliamentary and Health Service Ombudsman, Millbank Tower, Millbank, London SW1P 4QP, telephone: 020 7217 40 64, email press@ombudsman.gsi.gov.uk
You can also read the reports on the website at: http://www.ombudsman.org.uk where you can also find other Ombudsman publications.