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16 May 2007

Tax Credits

Westminster Hall

John Barrett (Edinburgh, West) (LD): This is not the first time that I have had to initiate a debate on the problems with the tax credits system on behalf of my constituents. I would love to believe that today is the last time that I will be required to do so. On the previous occasion, I was very grateful to the Paymaster General for the speedy resolution of the cases that I raised. I hope for a similarly positive response today. I would also like to send her my best wishes for a speedy recovery.

When I last had the opportunity to speak in the House on the issue, I and other hon. Members raised a number of key concerns: the unfair way in which Her Majesty’s Revenue and Customs is attempting to claw back funds; the complexity of the system; the fragile and failing IT system; and fears that the tax credit office is acting improperly in some cases in its attempts to reclaim overpayments. I cannot help but feel a sense of déjà vu today, as in many areas the problems remain.

Last week was a week of change in British politics, with the Prime Minister announcing that he was stepping down and the Blair era drawing to a close. However, last week’s report on tax credits from the Public Accounts Committee showed that some things in British politics never seem to change. The tax credits system remains in disarray. It is still failing to help properly many of the families whom it was set up to help.

Perhaps most worrying of all is the nagging feeling that, despite all the damning reports and newspaper headlines, the Government have still not fully accepted the scale of the problem. I am not alone in saying that the Government, crucially, are dragging their heels over essential reforms. Hardly a week goes by without constituents of mine turning up to advice surgeries having experienced problems with tax credits. I am sure that most hon. Members here today could say the same. However, for every constituent who contacts their MP, asking them to take up a case, there are many more who in effect decide to suffer in silence. Today’s debate should not be just for our current casework issues; it must also be for our constituents who have had problems with tax credits, but have decided to accept the failings of the system when their overpayments have been clawed back—they have decided simply to pay up.

I hope that the Minister will not attempt to pretend that I or others are blowing problems out of proportion. The scale of the problem is considerable, and real people are paying the price. One clear example of that is the number of people who do not want to claim tax credits for fear of discovering at a later date that money that they have spent must be repaid. I cannot estimate their number. If the Minister can, I hope that he will share it with us today.

The other number that I cannot give is the number of claimants who are spending their tax credits today in the belief that it is their money, but who will find out in the future that they should not have been given it and they are expected to repay it, even when they supplied all the information asked for, and in proper time. I will come later to the possible scale of the problem.

I will not be so churlish today as to suggest that the tax credits system has not helped people; of course it has. However, I hope that the Minister in his reply will accept that it has made life a misery for too many families and that the Government must take responsibility for the failings that have still not been dealt with.

The figures will be all too familiar to most hon. Members, but it is worth reminding ourselves of the scale of the problems facing the system. As last week’s Public Accounts Committee report outlined, overpayments totalled about £5.8 billion over the first three years—a staggering total. The Department has attempted to recoup some of those overpayments, but has not always been able to do so. As a result, more than £500 million has so far been written off, and it is estimated that in excess of another £1 billion-worth of debt might be impossible to recover.

In my own city of Edinburgh, the most recent figures for overpayments show that 11,200 of 34,000 tax credit awards were overpaid—about one third of all awards. Figures from 2004-05 show that a total of £9.5 million is due to be repaid by Edinburgh recipients whose tax credit awards have been overpaid. That will result in an average due repayment across the city of about £850—enough to throw the budgets of most families out of the window.

I could give numerous examples of individuals who have contacted me since 2003, but today I will give just one or two, because they capture what is at the heart of the problem. Deborah Karimi, a 48-year-old mother of two who lives at 72 Muirhouse green in my constituency, is one example of a person who works hard—she is employed in a Sainsbury’s supermarket—but who has been through such a bad experience that when advised recently that she might qualify for other benefits, she said that she would not apply for them after her experience with tax credits.

Mrs. Karimi was earning about £10,000 a year when she was granted a rent rebate from her local authority. She had supplied her three most recent wage slips to the authority and was advised by it that she might qualify for tax credits. Her most recent P60 at the time was only about one month old. It was just after the end of the tax year and the document showed her earnings at about £10,000, yet she was asked for the details of her previous P60, for the previous year, when she worked part-time and her earnings were between £6,000 and £7,000. She repeatedly offered details of her current pay, but was told that that was not how the system worked. She was told that her award would be calculated using the old P60. Some four months later, she would be asked for details of her current P60, showing that she was earning £10,000 a year.

At the same time, Mrs. Karimi received correspondence from the tax credit office saying that the payments would stop, and more correspondence confirming that the payments would continue. She was receiving £115.28 a month, which was thankfully received and spent every month. She was a low earner in full-time employment—exactly the kind of person who needed help to stay in work, rather than living on benefits. She was earning about £11,000 a year and was told that her overpayment total was £1,280.47, based on the fact that her income was too high to qualify. That is the income on the P60 that Mrs. Karimi offered to supply in the first instance, but which was refused. One has to ask just exactly how she could have been more helpful. She is an honest individual.

Jo Swinson (East Dunbartonshire) (LD) : I sympathise with my hon. Friend’s constituent. I wonder what his view is of the case of one of my constituents, who was told that they had been overpaid to the tune of £5,300 and that that had to be repaid within one year. Surely by definition families who are in receipt of tax credits cannot find the money required to repay sums of £400-plus a month. That causes huge stress and in some cases makes people ill with worry. The system is so complicated and is letting people down.

John Barrett : The case that my hon. Friend raises is, sadly, all too typical. Some people have not only spent the money; they may also have taken on hire purchase agreements, based on the estimated new income. They cannot live on the basic income, which is obviously low in order for them to qualify for tax credits. They have then spent that money and taken on further debts. They have the worst of both worlds. It is perfectly reasonable to accept, as is in the rules, that if hardship will be caused, in some cases these debts must be written off.

Mrs. Karimi is an honest individual who is working hard to this day. She is repaying her debts by working every alternate weekend and she is currently paying off an outstanding council tax debt at £50 a month. That is no mean feat on earnings of about £11,000 a year, but as she has told me, “You can’t get blood out of a stone” and the threat to take her to court for the money will result in legal fees for lawyers and nothing much else. If ever there was a case of a debt causing hardship and needing to be written off, that case and the case raised by my hon. Friend the Member for East Dunbartonshire (Jo Swinson) are two examples.

Mrs. Karimi had gone to the tax credit office with the correct up-to-date information and was told that no, she needed to provide out-of-date information, which both she and the tax credit office knew would result in overpayments. Yet because that is the way in which the system operates, she is told that that is the way it has to be. It is surely a recipe for disaster.

Just yesterday, I was contacted by Citizens Advice, which is increasingly concerned about the rising number of cases in which citizens advice bureaux are having to advise clients about overpayments when the clients have no idea why they have been overpaid and find it difficult to obtain explanations. In many cases, even the amount owed is unclear. At the same time, in the past few months the number of clients who have been threatened with legal action for recovery of overpayments, even in those circumstances, has increased.

The Minister might be interested to know that Citizens Advice is conducting an online survey asking the public to report their experiences of the tax credit system. So far, 80 per cent. of respondents have reported being overpaid, most of whom did not find it easy to understand why.

Mr. Mark Francois (Rayleigh) (Con) : I am listening carefully to the detailed case that the hon. Gentleman is making. Does he accept that one of the system’s great weaknesses is that when people receive a notification telling them that they have been overpaid, there is usually no breakdown of the relevant calculations? Those people are then suddenly required to pay back the money, which is sometimes quite a large sum, without even knowing how the debt was arrived at.

John Barrett : It must be very simple to supply people for whom an overpayment has been calculated with details about payments. One of the tests as to whether overpayments should be paid back is whether the individual could reasonably have worked out the correct amount. I would say that it is reasonable for an applicant to presume that the Government’s calculations are correct, and that it is unreasonable to expect a low earner who receives tax credits to assume that the Government have made a miscalculation. If details about payments were supplied, more people would know right away what the calculations were, and the problem would be solved. While overpayments remain so common, there is an urgent need for an improvement in the way in which overpayments are explained, as the hon. Gentleman suggests.

Citizens Advice is calling for a 30-day delay before the recovery of the overpaid amount starts. I entirely agree. If constituents of mine have been open and honest in their dealings with the tax credit office, but internal mistakes have led to an overpayment, it is simply unacceptable to demand large amounts of money back from those people, who reasonably assumed that the Government got their sums right. It is nothing short of outrageous that decent, honest, hard-working people are being forced into financial hardship as a direct result of incompetence in the system.

Several of my constituents who have had their fingers burnt by the tax credit system tell me that they will not bother to apply for tax credits again, not because they do not need the extra help, but because they cannot cope with another round of wrangling with the tax credit office about entirely avoidable overpayments. Evidence from Citizens Advice shows that more and more eligible families who have had problems are now reluctant to claim what they are entitled to. Some 2 million people who are eligible for tax credits do not claim them. I wonder how many of them have simply decided that the short-term benefits are not worth the headaches in the long-term.

I could list more examples of overpayments, but it is more important to discuss what the Government are doing to get to grips with the problems, and whether they have been effective. The most important change that Ministers have made to reduce overpayments has been to raise from £2,500 to £25,000 the threshold for in-year income increases that are ignored when awards are finalised. The Government contend that that change will eventually reduce overpayments by a third. However, a recurring complaint is that there is not enough data about the problems in the system to be able to say definitively what difference such a measure will make. Either way, the move does nothing to address the failure and unfairness at the heart of the system. What is needed is a fundamental rethink of the benefits system and a move towards a fairer system of fixed awards and clearer notices. I am sure that my hon. Friend the Member for Inverness, Nairn, Badenoch and Strathspey (Danny Alexander) will go into that in detail when he sums up on behalf of the Liberal Democrats.

The general problem with the complexity of the system is at the root of many of its woes. Nowhere is that more obvious than in the Department’s struggle with error and fraud. Tax credits suffer from the biggest error and fraud rates in Government, but, crucially, there are neither routine estimates of fraud and error nor targets set for reducing them. In 2003-04, between £1.06 billion and £1.28 billion—almost 10 per cent. by value—was incorrectly paid to claimants.

I look forward to hearing the Minister’s response to the recommendation of the Public Accounts Committee that targets and estimates should be introduced urgently. This issue highlights the recurring difficulty of establishing the true scale of the problems in the system and how effectively they are being tackled, because we simply do not have access to sufficient information to make those judgments. We desperately need earlier estimates of overall levels of error and fraud to use as benchmarks to assess the effectiveness of action to combat those problems. As was outlined in the Committee’s report last week, the e-portal system was deficient from the outset and was entirely unsuited to the inevitable onslaught from organised criminals. The entire system was unable, by its very design, to give proper protection against error and fraud.

Many of my constituents feel that the Government have placed greater priority on trying to chase and claw back money from hard-working families who have been unwittingly overpaid instead of rolling up their sleeves and dealing with the internal problems that have allowed such high levels of fraud and error to occur. The Chancellor is searching around for new ideas for his first 100 days in No. 10, but I suggest that he should concentrate first on sorting out the mess in the tax credit system. The Government seem to be perpetually in denial about the scale of the problem, but the ongoing difficulties can no longer be passed off as teething problems that are common to any new administrative system. They are deep-rooted difficulties at the heart of the system.

The first steps to solving the overall problem are to accept its seriousness and scale and to get to grips with the problems and their causes. The recent parliamentary ombudsman’s report, “Tax credits: putting things right”, made 12 key recommendations that were widely supported by families and Parliament alike. Many months on, however, I believe that only four of those recommendations have been implemented. If the situation has changed substantially, I would welcome some clarification from the Minister. If the other eight recommendations still have not been accepted, I should like to know why. Why have so many of the ombudsman’s recommendations been ignored? Why are 2 million eligible people now deciding that applying for tax credits is not worth the risk? Why are hard-working families being made to pay for mistakes that they have not made? I look forward to hearing the Minister’s replies.

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This website was established while I was a Member of Parliament. The site content is being kept online as a source of information, but all forms / email have been disabled.