CAB clients’ experience of tax credits
Summary
1. Tax credits are one of the government’s flagship policies. Most hard working families with children now receive tax credits to supplement their income, but many of the poorest families rely absolutely on them. Our purpose in publishing this report is to draw attention to evidence from Citizens Advice Bureaux which shows that tax credits are not currently working effectively for many of the people who rely most heavily on the additional income. We firmly support tax credits as a vehicle for directing substantial extra money towards lower income families, and we want the system to work effectively for all who are entitled to the extra help.
2. The Government’s reforms of tax and benefits in recent years have been based on making work pay, and tackling poverty. The government is committed to halving child poverty, and wants to ensure that 70% of lone parents are in work, by 2010. These are objectives that Citizens Advice welcomes. There needs to be rapid improvement to administration and adjustment to the way in which overpayments are recovered, to ensure that the tax credits system helps achieve anti-poverty objectives and does not frustrate them.
3. 6.1 million families, containing 10.3 million children have been awarded tax credits. This includes 0.8 million families who receive social security benefits for children but not tax credits. The total amount paid out last year was valued at £13.6 billion. For those on the lowest incomes a tax credit award, including childcare can be worth a substantial part of their weekly income. A lone parent with one child, working 20 hours a week earning the minimum wage and paying £80 a week for childcare would be entitled to over £8,000 a year in tax credits. Families on higher incomes receive about £10 a week. A family with income of £25,000 a year would receive £545 a year.
4. Tax credit administration has been subject to a completely unacceptable level of error. In delivering tax credits, the Revenue has failed to live up to its own standards of information clarity and efficiency of service.
5. Tax credits are intended to provide a guaranteed and stable income. It is well known[1] that people on the lowest incomes budget on a weekly, and not an annual basis, so stability of income from week to week is just as important as paying the additional amounts that tax credits now offer.
6. It is also well known that families on the lowest incomes, especially lone parents and non-homeowners, some of the key groups intended to benefit from tax credits, are the most over-indebted and the most at risk of debt problems arising if their work or personal circumstances change.[2] DWP research has also shown that falls in income of as little as 10% have a large impact on savings behaviour.[3]
7. Many people suffer from a lack of basic literacy and numeracy skills, yet claiming and renewing tax credits, and keeping the Revenue informed about material changes of circumstance means people must be capable of handling complex information and maintaining full household records. We do not think this is realistic, even if the system is administered correctly.
8. People on low incomes, lone parents and people with disabilities are all the focus of key government policies designed to reduce poverty and to encourage work and saving. This means that the stakes for the success of tax credits as a policy are high, if the tax credits system is to work well for those that rely on it the most. These families are also amongst those most likely to seek advice from Citizens Advice Bureaux.
9. High quality delivery of tax credits is absolutely vital. Tax credits should be delivering leading edge public sector customer services. This report, which is based on CAB evidence from across the UK, finds that it has a long way to go to deliver.
10. The key things going wrong are these:
- The complexity of tax credits makes it difficult to understand;
- Information to claimants is complex, yet there are financial penalties for not complying with rules on claims and renewals.
- Substantial levels of error have diminished confidence in tax credits;
- There are lengthy delays in resolving problems;
- High levels of over and underpayments have arisen, causing considerable ongoing problems;
11. The consequences and impacts of these problems are that:
- We have received reports of people whose jobs are at risk, because they cannot continue to pay for childcare after losing the support they were getting from tax credits;
- We continue to see people whose actual incomes are below the level of income support, and who are by definition living in poverty, often as a result of a tax credit error that was not their fault;
- We have seen people whose homes are at risk, because they are in arrears with rent or mortgage payments after tax credit income was stopped or severely reduced.
- Some people have been wrongly advised to take out loans to repay tax credits
- Our evidence shows there is loss of confidence in tax credits amongst the hardest to reach groups.
12. Our concern is based on the evidence we continue to receive from Citizens Advice Bureaux which shows that the tax credits system is failing for large numbers of our clients, by causing poverty and reducing their ability to work. For CAB advisers, resolving problems is also far too protracted and difficult, because of poor administrative systems.
13. The scale of the problems faced by clients, and the difficulties our advisers have had in resolving even relatively simple errors and problems, have been very substantial. It is noticeable that tax credit problems are causing disproportionate levels of concern amongst our clients and advisers. Bureaux have been asked to advise on around 150,000 client problems with tax credits in the year from April 2004 to the end of March 2005. In the past two years, Citizens Advice has received more than 12,000 reports and complaints about problems with tax creditsfrom bureaux.
14. Whilst this is not an extraordinary number of amount of client problems (compared with almost two million benefit problems bureaux deal with each year, or 500,000 employment-related problems), CAB advisers are saying that tax credits is their number one policy concern. This appears to be because tax credit cases are extremely complex and advisers find resolving them time-consuming. Also in many cases the problems facing their clients are often very serious indeed.
15. Many clients are seeking advice from Citizens Advice Bureaux because they cannot understand their award notices, or need a simple error corrected and have not been able to resolve matters directly with the Revenue.
16. We welcome the statement made on 26 May 2005 by the Paymaster General, announcing that steps would be taken to improve tax credit administration:
- A review of effectiveness of information, including clarity of award notices and duplication;
- Information targeted towards people most at risk of overpayments;
- Better quality of service from the Tax Credits Helpline;
- Faster identification of IT problems and errors;
- Innovative working with the voluntary sector to provide advice to families receiving tax credits;
- A review of the operation of the code of practice on recovery of overpayments.
17. We look forward to further discussion with the Revenue about the exact timing and nature of their detailed proposals, which may go some way towards addressing the problems we highlight in this report. There need to be rapid improvements in administration and communication, and we hope that our report is useful in reforming the system.
18. We also believe that many existing overpayments caused by Revenue errors will need to be written off, and that there must be changes to the rules governing the way overpayments are recovered, and payments adjusted. These changes would serve to restore confidence in tax credits, and ensure that the system cannot reduce income to below poverty levels and remove work incentives.
19. We welcome the determination that is now being shown to secure improvements in tax credit administration. In order to improve accountability and transparency, we would welcome publication of more performance and other information. It is important that more information is provided about errors in tax credit awards, complaints and response times, waiting times for appeals, and especially about the extent of adjustments to awards that leave families on incomes below weekly or monthly entitlement.
20. Our main recommendations are designed to ensure that understanding of the system amongst claimants is improved, and that changes to tax credit payments do not cause the very hardship tax credits are designed to prevent.
Key recommendations
Quality of administration
21. It is vital that claimants are able to understand tax credits and can obtain accurate information. We are disappointed that planned changes to award notices will not be introduced until April 2006, and urge faster implementation.
22. Tax Credit helpline advisers must be able to explain award notices to claimants.
23. In order to improve accountability and transparency, we would welcome further published performance and other information on complaints, correspondence response times, appeal clearance times, and numbers of award adjustments that leave families on incomes below their weekly or monthly entitlement.
Recovery of overpaid tax credits
24. Huge amounts of overpayments and errors have occurred as a result of system failings. Urgent action needs to be taken in order to restore confidence in the system. A new approach is needed, and we recommend the following five steps:
- All adjustments to payments should be limited to ensure that claimants cannot be left with weekly incomes below minimum levels.
- Where there is an overpayment from a previous year and from a current year recovery must not be compounded, so that maximum reductions in payments apply.
- In the light of the historic high level of administrative errors, more overpayments should be written-off. All overpayments being recovered from final awards or adjustments, where the overpaid amount has arisen through no fault of the claimant or through fraudulent activity, should now be waived.
- There should be a proper independent right of appeal against Revenue decisions, in cases where mistakes were caused by the Revenue, whether or not it was reasonable for the claimant to spot the error on a complicated award notice.
- We believe the childcare element of working tax credit should always be paid in full, in order to enable families to remain in employment.
[1] For example, How people on low incomes manage their finances ESRC 2002
[2] Overindebtedness in Britain, a report to the DTI, Kempson, 2002
[3] Savings and Life events, McKay and Kempson DWP Research Report 194 October 2003
Social policy contacts: Katie Lane, email Citizens Advice social policy
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