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.
