Tax Credits and PAYE
Total Page:16
File Type:pdf, Size:1020Kb
House of Commons Committee of Public Accounts Tax Credits and PAYE Eighth Report of Session 2007–08 Report, together with formal minutes, oral and written evidence Ordered by the House of Commons to be printed 28 January 2008 HC 300 [Incorporating HC 1061-i, Session 2006-07] Published on 5 February 2008 by authority of the House of Commons London: The Stationery Office Limited £0.00 The Committee of Public Accounts The Committee of Public Accounts is appointed by the House of Commons to examine “the accounts showing the appropriation of the sums granted by Parliament to meet the public expenditure, and of such other accounts laid before Parliament as the committee may think fit” (Standing Order No 148). Current membership Mr Edward Leigh MP (Conservative, Gainsborough) (Chairman) Mr Richard Bacon MP (Conservative, South Norfolk) Angela Browning MP (Conservative, Tiverton and Honiton) Mr Paul Burstow MP (Liberal Democrat, Sutton and Cheam) Rt Hon David Curry MP (Conservative, Skipton and Ripon) Mr Ian Davidson MP (Labour, Glasgow South West) Mr Philip Dunne MP (Conservative, Ludlow) Angela Eagle MP (Labour, Wallasey) Nigel Griffiths MP (Labour, Edinburgh South) Rt Hon Keith Hill MP (Labour, Streatham) Mr Austin Mitchell MP (Labour, Great Grimsby) Dr John Pugh MP (Liberal Democrat, Southport) Geraldine Smith MP (Labour, Morecombe and Lunesdale) Rt Hon Don Touhig MP (Labour, Islwyn) Rt Hon Alan Williams MP (Labour, Swansea West) Phil Wilson MP (Labour, Sedgefield) The following were also Members of the Committee during the period of the enquiry: Annette Brooke MP (Liberal Democrat, Mid Dorset and Poole North); Chris Bryant MP (Labour, Rhondda), Mr John Healey MP (Labour, Wentworth), Ian Lucas MP (Labour, Wrexham), Mr Iain Wright MP (Labour, Hartlepool), and Derek Wyatt MP (Labour, Sittingbourne and Sheppey). Powers Powers of the Committee of Public Accounts are set out in House of Commons Standing Orders, principally in SO No 148. These are available on the Internet via www.parliament.uk. Publication The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the Internet at http://www.parliament.uk/pac. A list of Reports of the Committee in the present Session is at the back of this volume. Committee staff The current staff of the Committee is Mark Etherton (Clerk), Philip Jones (Committee Assistant), Emma Sawyer (Committee Assistant), Pam Morris (Committee Secretary) and Alex Paterson (Media Officer). Contacts All correspondence should be addressed to the Clerk, Committee of Public Accounts, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 5708; the Committee’s email address is [email protected]. 1 Contents Report Page Summary 3 Tax Credits 5 The Department’s settlement with EDS 6 The taxation of small pensions 6 1 The service provided to tax credit claimants 7 Complaints 9 2 Overpayments of Tax Credits 10 3 Claimant error and fraud 12 4 The Department’s settlement with EDS 13 5 The taxation of small pensions 14 Formal Minutes 15 Witnesses 16 List of written evidence 16 List of Reports from the Committee of Public Accounts 2007–08 17 3 Summary HMRC has paid £65 billion to tax credit claimants since the scheme was introduced in 2003. Awards are made on an annual basis and payments are initially made on provisional data; a final assessment is made once the claimant’s actual circumstances are known after the end of the year, which can change the final value of the award. The Department overpaid £6 billion in the first three years of the scheme. By the end of March 2007 it had collected £2 billion of this debt and written off £0.7 billion. £3.3 billion of these overpayments remain to be collected. It is unlikely to recover £1.6 billion of the debts. This is the Committee’s fifth report on the current tax credits system. Although the administrative cost has increased from £406 million in 2003–04 to £587 million in 2006– 07, there is little evidence the Department has the scheme under control. Many claimants continue to struggle to understand tax credits and why they are overpaid. There have been many complaints about the process for recovering overpayments and the Ombudsman continues to receive and to uphold a large number of complaints. Tax credits continue to suffer from the highest rates of error and fraud in central government. HMRC estimates that claimant error and fraud led to incorrect payments of between £1.04 billion and £1.30 billion in 2004–05. This level of error led the C&AG to qualify his opinion on the HMRC Trust Statement for the fifth year running. The Department still has no targets for reducing error and fraud. In November 2005, the Department concluded a settlement of £71.25 million with EDS in respect of the computer problems during the introduction of Tax Credits. Of the sum, £26.5 million depends on EDS winning future work from the Government, but the flow of payments from EDS has been extremely small, and it is highly unlikely that new business to EDS will generate the full payment. Progress in addressing many of the Committee’s previous recommendations on tax credits has been disappointing, and the Committee will wish to return to this subject in the future to establish the extent to which these difficulties have been addressed. On a separate issue, the Department has not been collecting income tax on certain small pensions since the early 1980s, with a potential tax loss of some £135 million per annum. It will not recover tax due from previous years, but will start to collect tax on these pensions from 2008–09. 5 Conclusions and recommendations Tax Credits 1. The Department has overpaid £6 billion in tax credits in the first three years of the scheme. By the end of March 2007 the Department had collected £2 billion, written off £0.7 billion and made provisions for a further £1.6 billion of overpayments it is unlikely to recover. Overpayments currently affect 1.9 million families a year, significantly greater than the estimate of 750,000 when the scheme was designed. The policy changes to reduce overpayments included in the 2005 Pre- Budget Report have yet to take full effect. The Department should report on their actual cost and effect in terms which show whether they meet their objective of reducing overpayments by one third. 2. Claimants may not understand why they have to make repayments, especially where they find themselves owing money to the Department where they were not previously in debt. Some regret ever getting involved with the scheme. The Department is looking to introduce more flexibility into the system to allow it to deal with certain categories of claimant more effectively. It needs to explain clearly in its award notices how the scheme works and how overpayments may arise. 3. The Department has yet to succeed in clarifying its procedures for recovering overpayments. The Department has not sought to recover overpayments where it has made a mistake and the claimant could reasonably have thought the payment was right, but has had to make difficult judgements about what claimants could be expected to know. In 2006–07, 371,000 households disputed the recovery of overpayments, of which some 10,000 resulted in write-off. The Department needs to devise and implement a more objective test for assessing when tax credits claimants could reasonably have known they were overpaid. 4. The Department has made a series of changes to the tax credits computer system, but software errors continue to affect some payments and it still has to fallback on manually processing certain awards. The Department accepts that the computer system is fragile which makes it very difficult to improve processing. The Department needs to strengthen its computer systems to make them more capable of supporting desired changes to processing. 5. In 2006–07 the Ombudsman reviewed 393 complaints about tax credits, of which 74% were fully upheld or partially upheld. The proportion of complaints upheld on tax credits is higher than for any other department investigated by the Ombudsman. It is unsatisfactory that so many people have to pursue their complaint through the Ombudsman, having exhausted the Department’s own complaints procedures. The Department needs to determine why such a high proportion of complaints to the Ombudsman are upheld and reassess its own procedures. 6. Levels of claimant error and fraud remain unacceptably high, and the Department is still losing £1 billion each year. The Department has accepted the Committee’s previous recommendations on the need to set targets for reducing error and fraud, but says it cannot set a target until 2008 when it will hold two years of 6 good data. The Department should not have taken five years to get these targets in place. When setting these targets, it should also determine the additional resources required to achieve the target reduction in error and fraud. 7. The Department accepts changes in income and circumstances notified to it by claimants, so erroneous or fraudulent disclosures may only be detected by post payment checking and may go undetected altogether. The Department needs to assess in detail the risks of claimant error and fraud and establish whether the responses it currently has in place are sufficient to achieve its target reduction in error and fraud. The Department’s settlement with EDS 8. In settling its claim against its contractor EDS for the problems encountered in implementing the tax credit system, the Department agreed that £26.5 million of the settlement could be paid in instalments reflecting new government business won by EDS.