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Tax Credits

rose to ask Her Majesty’s Government whether the operation of the tax credits system is satisfactory. The noble Lord said: My Lords, I am grateful to have the opportunity for this debate on whether the operation of the tax credit system is satisfactory. The new tax credits—the child tax credit and the working tax credit—were introduced in April 2003. The most recent parliamentary review of them by the House of Commons Treasury Select Committee was published in June this year. It is a cross-party document, and I have taken it as the best non-partisan source for my remarks tonight. I will cover three problem areas that are highlighted in particular: first, overpayment of the credit to claimants; secondly fraud and organised crime; and thirdly the way forward to improve the system. The Government state that the tax credit regime provides support for 6 million families and 10 million children. However, in 2003-04 about one-third of all tax credit awards paid—nearly 1.9 million awards—were overpaid at a cost of nearly £2 billion. In December 2005, the Paymaster General indicated that, but for reforms announced in the Pre-Budget Report 2005, "““initial estimates had suggested that subsequent years’ overpayments would have been of broadly the same level as in 2003-04””." I am not certain if the overpayment figures for 2004-05 and 2005-06 have been published yet. Will the Minister give me those figures? For 2003-04, of the 1.879 million claimants who received overpayments, about 41,000 received overpayments of £5,000 or more. Half the total overpayments related to some 283,000 families, who had been overpaid by £2,000 or more. The National Audit Office explained why the design of tax credits necessarily results in overpayments. It said, "““A tax credit award is provisionally based on a family’s income and circumstances from the preceding tax year. The award is finalised after the end of the tax year once income and circumstances are known for certain. The final award will be lower than the provisional award where incomes increase, although the first £2,500””—" now up to £25,000— "““of any income increase is disregarded””." However, the NAO also stated: "““Further unforeseen overpayments have occurred””." Full recovery of overpayments from 2003-04 is expected to take nearly five years. To date, the Government have written off some £95 million of overpayments and have made provision for a further £961 million to be written off eventually. The committee says that the factors cited by the Paymaster General and her officials as contributing to the causes of overpayments do not given the full reasons why the overpayments have arisen. The Paymaster General has referred only to those causes of overpayments that can be attributed to error by the claimant, or omission, or to the design of the tax credits regime, or a combination of those. The Paymaster General, in the committee’s view, makes no reference to causes of overpayments that have arisen due to HMRC’s own processes—for example, official error and information technology system error. Does the Minister agree with the committee’s conclusions? The report goes on to state that recent research indicates that the tax credits regime, which is designed to deliver the correct amount of state assistance over the year as a whole, could be aligned more closely to the financial needs of those families who tend to and need to budget over a month or less, rather than the whole of a tax year. The committee goes on to say that it is obvious that HMRC cannot, however, as a whole take steps to improve the way that it administers tax credits without first identifying and developing a detailed understanding of the factors that cause overpayments and the extent to which each individual factor has contributed to the overpayments problem. It recommends that as a priority the Government should provide a detailed breakdown of as much of that information as is currently available. Does the Minister agree, and will he provide the House with the necessary information? The committee is clear that official error has been a cause of overpayments in a significant number of cases. The Paymaster General has said that no complete analysis exists of official error causing or contributing to overpayments. In my view, that is a significant gap in HMRC’s understanding of the reasons that overpayments arise. Does the Minister not agree with the committee’s view that if HMRC is to succeed in improving the administration of the tax credits regime, it first needs to understand what is going wrong within its own processes before it looks to problems elsewhere? Does he not agree also with the committee’s argument that the Government should undertake a complete analysis of the incidence of official error and the extent to which that causes or contributes to overpayments, that they should publish that analysis, and that if they cannot carry out such analysis, they should explain why? The committee also believes that HMRC has failed to assess the contribution made by information technology error. It recommends that the Government undertake a complete analysis of the incidence of that and the extent to which it causes or contributes to overpayment, and that they publish that analysis. Does the Minister agree? The IT system delivered by EDS for running the new tax credits system was unsatisfactory in several respects, as was highlighted by the NAO’s evidence to the committee. Yet, when the Government ended the contract with EDS in June 2004, an extraordinary agreement was made. While the Government were to be compensated for EDS’s mistakes by £71.25 million, up to £26.5 million of that, in staged payments, would be contingent on EDS winning new business with the UK Government. But there was no guarantee that EDS would win sufficient business to trigger payment of the full amount. The committee strongly questioned the wisdom of an agreement that made the payment of compensation to the affected government department by the provider of that unsatisfactory service contingent on that provider winning other contracts with the Government. The committee’s concern, rightly, is that contingent payments will influence future decisions by Government departments to award contracts. It believes that: "““The agreement has the appearance of impropriety, if not the fact””." Can the Minister say whether the full £26.5 million has been received and how many government contracts have been awarded to EDS since June 2004? On the recovery of overpayments, I agree with the committee that HMRC should not seek to recover either an excess payment made in the current year or an overpayment from the previous year until it has come to a decision on whether the excess should be recovered, in accordance with COP 26, which requires two questions to be answered satisfactorily: did HMRC make a mistake and, if so, was it reasonable for the claimant to think that his or her payments were correct? Why do the Government appear to be delaying implementation of the ““pause before recovery”” of an overpayment? In any case, is there not a statutory right of appeal to a tribunal, under Section 12 of the Social Security Act 1998? Does the Minister support calls from the voluntary sector and the ombudsman for the introduction of an appeal to an independent tribunal? On the subject of fraud, error and organised crime, I am concerned, as is the committee, that it is now over two years since the end of the 2003-04 tax year, yet HMRC has yet to establish the final levels of claimant error and fraud in the tax credits regime for that year. An interim figure of 3.4 per cent has been indicated, but the committee understands that the figure will be significantly higher. Apparently, organised criminals were able to make claims over the internet without proving their identity. However, HMRC’s internal office concluded that there was a lack of comprehensive information to allow a robust analysis of the problem. Then, in December 2005, HMRC announced the closure of its tax credits portal, following attempts to defraud the tax credits regime by making claims through it. Those claims falsely used internal information held by DWP about its staff. The Paymaster General admitted in February 2006 that some 8,800 staff identities may have been stolen in 2003-04. Of those, 6,800 had been used in an attempt to defraud the tax credits regime in 2005. The Paymaster General gave details of another fraud, involving the use of identities stolen from Network Rail employees, stating that HMRC’s investigations had resulted in at least 16,000 claims being stopped. The Paymaster General also disclosed that, from April 2004 to November 2005, HMRC intervened on approximately 56,000 incorrect claims where fraud was suspected, of which HMRC estimated that 19,500 arose as a result of organised attacks. From October 2004 to November 2005, HMRC identified and stopped over 22,000 tax credit claims in payment where organised fraud was suspected. Does the Minister have any updated figures of the loss to HMRC due to fraud, other than the figure of £2.7 million from the DWP fraud and the £15 million general figure from organised fraud as stated by the NAO in the committee report? Can he guarantee that there are no plans to reduce the number of staff in the tax credits compliance department of HMRC? My final subject on the report is the way forward. I welcome the fact that the Government are seeking to improve the operation of the tax credits regime by introducing a package of reforms. However, how can they be confident of their estimates of the overall costs of the package? For instance, they expect the package to be broadly revenue neutral, but how will this be when the disregard threshold is being increased from £2,500 to £25,000, which could prove costly? We on these Benches believe that HMRC should improve its service to claimants. We want the tax credits system to work properly so that those who are most deserving benefit from it. We want to make the system as user-friendly as possible so that no one will be put off by its complexity and we want its administration to be as efficient as possible. Therefore, I commend the Treasury Committee report and look forward to the Minister’s response.