Tax credits scheme: Millions driven into debt

THE FIASCO of the tax credit system has hit the headlines again. Stark figures show that millions of low-paid workers are being driven into debt by a system set up to overcome poverty.

By a London Citizen's Advice Bureau (CAB) worker

When the new tax credit system was introduced in 2003, it was heralded as a key element of Gordon Brown's anti-poverty measures. However, the scheme had an additional aim - to force unemployed workers off Jobseekers Allowance and into low-paid jobs.

From the outset, the scheme was beset with problems, not least an inflexible computer system and insufficient staff. Almost two million families were 'overpaid' tax credits totalling £2.2 billion in 2003-04 and £1.8 billion in 2004-05. In addition, the number of households that received less tax credits than they were entitled increased from 713,000 to 906,000, with underpayments totalling £556 million.

For the second year running one in two tax credit payments was wrong, and the government is still missing its target to cut child poverty. In fact, for thousands of families, tax credits have compounded their poverty existence. The Parliamentary and Health Service Ombudsman now says that families have been forced to run up debts and even live off food parcels when overpayments are clawed back.

Many people will find these figures bewildering and won't understand what is meant by 'overpayment'. The impression is being created that people are fiddling the system, particularly following recent press reports of tax credit fraud. In reality, the tax credit system has left a trail of poverty, debt and stress that has had a devastating impact on some of the poorest sections of our community.

Although some people may try to claim tax credits they are not entitled to, invariably to try to boost a meagre income, most tax credit overpayments result either from mistakes by the Tax Credit Office or because of the difficulty people have in understanding a very complicated system (see articles right).

More fundamental, though, has been the inherent unfairness of the tax credit system which has penalised workers whose circumstances change during a tax credit year.

Flawed system

FORMER WELFARE minister Frank Field likened using tax credits to alleviate poverty to using a hacksaw to perform delicate keyhole surgery. However, Field and other opponents lack a viable alternative.

The system itself is fundamentally flawed. In the old system of Family Credit, claimants were assessed and received a set payment for a six-month period, even if their income increased. But the new tax credit system resulted in dozens of different awards during the course of one year.

Thousands of people have been correctly assessed and received the tax credits to which they were entitled, but because their circumstances changed, they ended up owing the government thousands of pounds.

Until recently, tax credit income thresholds meant that a very low-paid worker who got a better paid job half way through the year had their tax credit award reduced - or even stopped - when they started their new job.

Not only that, they were also reassessed for the whole financial year and could find themselves having to repay tax credits they'd received in their previous job - because for the whole financial year they are deemed to have earned too much.

Likewise, parents on Income Support or Job Seekers Allowance, who now receive child tax credit instead of additional Income Support or Job Seekers' Allowance for their children. If these parents started work in a relatively well-paid job, they could end up paying back the child tax credit they received when they were not working.

This April, after many of these outrages, income threshold changes were introduced. The changes should mean fewer people will be penalised for moving into better-paid jobs, but scandalously the debts of hundreds of thousands of people from previous years won't be written off.

The government boast that six million families benefit from tax credits (ignoring the third who have to repay tax credits and the half who didn't receive enough).

But who is really benefiting? Most of all, it is the bosses and shareholders of companies who do not pay their workers enough to live on. In effect, tax credits are a form of state handout, to the tune of £16 billions each year, to measly bosses paying their workers poverty wages.

Tax credits are a means-tested benefit that costs six times more to administer than benefits as of right, but under capitalism no benefit system will eradicate poverty.

Every household should be guaranteed a minimum decent income, but this will not happen under a system where the profits of a greedy few millionaires are dependent on the poverty of millions.

Harsh results of 'official errors'

WHEN THE tax credit system was set up it was predicted that decision-making would be done automatically by computer and so would not need to be staff-intensive. Instead, the Tax Credit Office (TCO) is inundated with correspondence, which it does not have the staff to cope with.

In June 2005, the TCO had received 294,000 requests to reconsider demands for the recovery of overpayments because the TCO had made a mistake. By summer 2005 they were trying to handle 8,000 new disputes a week.

Cases can take months to sort out. One Citizens Advice Bureau reported that their client came to see them in June 2004 and it took 11 months to finally close her case. One adviser said the client had so many award notices they could have decorated the office.

It is extremely difficult to get overpayments written off, even when the overpayment occurs because of a mistake by the TCO (an 'official error').

The Treasury recouped £500 million of the £2.2 billion overpaid in 2003-04, but wrote off only £100 million. In 2004 Blair announced that "we will not seek to get the money back if the error is on the part of the Inland Revenue."

Despite this the TCO, (part of Her Majesty's Revenue and Customs or HMRC, formerly Inland Revenue), still uses a definition of 'official error' which is weighted against claimants.

Someone overpaid tax credits must show that the overpayment was due to a TCO mistake and that it was reasonable for the claimant to believe that their award was correct. In other words claimants are expected to spot that a mistake has been made.

Proving a TCO error is relatively easy for an experienced adviser, but convincing the TCO that a claimant was unaware of the mistake is much harder. Low-paid workers, for many of whom English is not their first language, are expected to be able to understand TCO correspondence that has been widely condemned for its complexity.

Invariably the TCO demands its money back, and repayment requirements are harsh; sometimes thousands of pounds have to be paid back over a maximum 12 month period, unless a claimant can show severe hardship.

'Overpaid' families, overworked staff, overstretched system

CLIENTS COME to see the Citizens Advice Bureau with reams of paperwork received from the Tax Credit Office (TCO), which even advisers struggle to make sense of. One person received three letters from the TCO with the same date; two said her overpayment was being written off while the third said the matter was being investigated.

Tax credit award notices, which supposedly explain how much tax credits you're entitled to, are often incomprehensible. They leave many workers clueless as to how their tax credits were calculated and how much they will be paid.

Several award notices can be issued within the space of a few weeks or even days with no clear indication of why payments have changed or stopped or which one is correct or the most current. This makes it hard for advisers to check accuracy.

But understanding the award is the easy part; dealing with a stressed low-paid worker facing demands to pay back thousands of pounds is harder, particularly when it's not always clear how an overpayment arose. Then you have to try to negotiate with overworked TCO staff who find themselves overburdened by a system cracking at the seams.

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