Tax credits: getting it wrong? – again

Issue 201 (December 2007)

Two years on from her first report on the administration of tax credits, Tax credits: putting things right, the Parliamentary Ombudsman Ann Abraham has produced a second report, Tax credits: getting it wrong? Beth Lakhani outlines the report's main findings and recommendations.


In this latest report, the Ombudsman refers back to the fundamental issues she mentioned in the first report - whether a system built on insecurity could meet the needs of low-income families and earners; the impact of that insecurity on claimants; and the fact that it was creating confusion and hardship and leading people to want to opt out of the system.

In her latest report, she includes examples of where the tax credit system, even when operating as intended, appears to be working against the key policy objectives of helping tackle child poverty. The Ombudsman points out that HM Revenue and Customs (HMRC) have made changes since 2006/07 such as increasing the earnings disregard, which, she states, should reduce the number of overpayments. However, she continues to receive cases of overpayments arising in earlier years and of recent decisions to recover or continue to recover the sums involved. These decisions will, she remarks, have a financial impact on the claimants for years to come, often causing hardship and anxiety.

Improvements since 2005

The current report recognises that HMRC have attempted to improve their services in accordance with the criticisms of the 2005 report - of particular note are:

  • Improvement in information given to claimants 'both in clarity and helpfulness' and she cites the award notice changes. CPAG would agree that some changes have been helpful but award notices remain mystifying documents rather than clear explanations of the award.
  • Attempts to raise customer awareness about the need to report changes of circumstances and to check award notices and to report errors.
  • Many technical problems resolved. However, CPAG has reports of problems where claimants have had to be paid manually due to problems with the IT system and some of these claimants have also had an overpayment attributed to the wrong year.
  • Reduction in human error, reducing the occasions when claimants receive multiple award notices on one day. However, CPAG had a report of a case this month in which three notices arrived in one day.
  • Reduction in backlogs in the sections dealing with disputed overpayments and complaints. Although, latest feedback to CPAG suggests cases may take months to progress.


The Ombudsman is concerned that complaints remain high, particularly in relation to overpayments and decisions about whether there are grounds for recovery, that for 2005/06 almost one third of tax credits were overpaid by at least £1,000, and of these 25,000 by £5,000, and finally that significant numbers affected those on annual incomes of less than £10,000. She deals with the complaints under three headings:

  1. The design of the tax credit system
  2. Failure in complaints handling
  3. The unfair and unreasonable application of COP 26
1. Design of the tax credit system

Complaints continue to arrive relating entirely to the annualised system, even when operated as intended.

There is confusion amongst claimants that a positive change such as finding employment can create a tax credit debt.

Finalising awards at the end of the year delays knowledge of the overpayment. Claimants report they budget carefully to avoid debt, but then have no savings with which to meet this new debt; claimants 'assume there must be some mistake'.

Claimants do not understand how the annualised system works. Many question the logic of the system in which it appears better to delay a return to work until the start of the following year.

2. Failure in complaints handling

HMRC are still failing to get decisions right the first time when dealing with a complaint. Where the focus of the complaint was what the claimant was told on the phone, HMRC did not locate or listen to the call in question. Additionally, CPAG has had reports from advisers that when they submit detailed letters of complaint, HMRC respond with a one- or two-line reply which does not deal with their substantive points.

Assumptions are made about what the award notice would have said without checking the notice itself. There continues to be confusion about the difference between a complaint, a dispute or an appeal. The Ombudsman concludes that 'the Tax Credits Office still have some way to go in providing "fit for purpose" complaint handling arrangements'.

3. Unfair application of COP 26

The Ombudsman accepts HMRC's expectation for claimants to check the personal information on their award notice and notify HMRC of any omission or error. CPAG is of the view that this expectation could be unrealistic, particularly for some claimants, given the complexity of the annualised system. In reality, claimants might do a check, but not be armed with a sufficient understanding or clear enough information to do this properly. The current layout of the award notice is still largely dictated by the computer programme, and although the leaflet TC 602 (SN) 'Checking your award' is helpful, the notice remains intimidating and confusing for many.

The Ombudsman criticises HMRC for the failure to consider the impact of overpayment recovery in terms of hardship and its failure to examine each case on its merits when deciding whether to recover the overpayment. She states that HMRC:

  • took a rigid approach to recovery and assume high levels of understanding of overpayments from claimants;
  • failed to take account of the different circumstances that existed in the first two years of the scheme - problems with the helpline, failure to record phone calls or reply to letters, and general unfamiliarity with the system on the part of both staff and claimants;
  • failed to consider the circumstances of the claimant at the time the mistake on the award notice occurred e.g., health problems causing the claimant to fail to follow up that mistake;
  • assumed that those who reported a mistake or reported a change of circumstances must have known their award was wrong and therefore failed the 'reasonable belief' test;
  • did not take account of the number of times the person had informed them of a change of circumstances or a mistake on their award notice and failed to act;
  • frequently failed to consider whether recovery would cause hardship.

As a result of these, some claimants on very low incomes were being unfairly required to repay debts (often large) caused by 'official error'.

The Ombudsman notes that discussions with HMRC, the Adjudicator's Office and the Tax Credits Office revealed an apparent divergence of understanding about the proper application of COP 26.

Other concerns - technical overpayments

The Ombudsman is concerned about claimants who make a claim in the wrong 'status' (e.g., as a joint claim rather than as a single claim) and as a result acquire an overpayment which, had they made the claim in the right way, might not have occurred (or indeed their actual entitlement might have been higher). She refers to the same issue in relation to renewals where there appears to be automatic recovery from those who fail to return the annual statement but argue that they never received the renewal forms. She describes the recovery of such 'technical overpayments' as defying common sense and at odds with the basic objectives of tax credits.

In her conclusion, the Ombudsman:

  • states that HMRC needs to look at the specific needs of the more vulnerable claimants and deal with them appropriately and sensitively; and
  • calls into question whether the tax credit system, with its inherent degree of financial uncertainty and possibility of debts arising, 'can really meet the needs of this particular group of individuals and families, and the policy objectives'.


These are targeted at safeguarding the interests of low-income families. Although the Ombudsman accepts that some of the revisions HMRC are proposing for the COP26 should 'go some way towards ensuring that decisions on recovery will be far less harsh and more appropriate to this particular customer group', these revisions will not be enough in themselves to deal with all the problems mentioned in the report. She therefore makes these final recommendations:

  1. HMRC to produce clear and comprehensive guidance for staff on the purpose and application of the code.
  2. Staff applying the code to be given training on the appropriate way to approach such cases.
  3. Analysis and feedback mechanisms to be created for staff to learn from successful complaints about a reasonable way to apply the code.
  4. HMRC to review guidance to staff on their approach to good cause in relation to apparent failure of some claimants to return the annual statement, so that the outcome is not unfair or unduly restrictive.
  5. HMRC to work in a more co-ordinated manner, so that the recovery of overpayments of tax credits can take account of other HMRC action in relation to tax credits and the impact on the claimant's circumstances.
  6. The Debt Management and Banking Unit to be required to tailor its approach to the needs of tax credit recipients. To take into account the circumstances (for example, health) of family members and to take action that is consistent with the objectives of the tax credits scheme

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