Poor deal as government claws back overpayments

Millions of families have been pulled out of poverty by the government's focus on poor families. But thousands are destined to be thrown back into hardship as the Inland Revenue begins to pursue overpayments made last year.

Children will be the losers, warn anti-poverty campaigners, who say they will be denied basics such as better quality food along with toys, trips and holidays while parents struggle with finances.

Campaigners said that overpayments in the first 18 months of the new tax credit system are leading to demands by officials for repayments. These, they say, will plunge many families back in situations the credits were designed to alleviate.

Families might be receiving higher child benefit payments than under the last Tory administration, but the sums involved are dwarfed by the money they can lose if they fall foul of the tax credit system.

A report by Citizens Advice later this month is expected to show that hundreds of families, rather than cheering the new system, have found it a nightmare.

In a separate report sponsored by the charity Child Poverty Action Group, the government is accused of promoting a tax credit system riddled with problems.

"There remains too much confusion among claimants," said CPAG's chief executive Kate Green. "While, of course, we welcomed the additional resources provided by the new system and have been pleased with the impact it has had for many low income families, the system remains riddled with problems.

"It is so complicated, too many people still do not understand it. There are also problems with overpayments, where claimants are being paid incorrect amounts through no fault of their own - and are then having money taken back leaving them and their children with very little to live on," she said.

While many must meet demands to repay what are now tax credit debts, others have been unable to claim at all, or if they have, spent years trying agree the correct figure.

Sara Rance, 50, contacted Jobs & Money to say she has been trying to sign on for tax credits since March 2003.

Her attempts to claim have elicited a compensation payment - £40 - because of "unnecessary worry caused by delays in dealing with the claim". But have any tax credits arrived? Not yet, said the mother of two from Bath this week, and it could be several more months before the situation is resolved.

Unlike Ms Rance, Liz Lewis was thrown the lifeline of tax credits (albeit after a long battle). Her problems have centred on the occasional Giro payments that drop through her letterbox. It took her more than six months to get the first one and they have proved haphazard ever since. No one can tell her when regular payments will resume while tax credit officials try to reconcile 12 files created to deal with her case. A dministrative incompetence pales, however, compared to the effects on claimants of overpayments.

The sums claimed by families in receipt of Working Tax Credit and Child Tax Credit can add up to a third of their take-home pay. Thousands of pounds can be at stake. When childcare payments - which total 70% of a maximum £200 a week per child (for families with two or more children) - are at stake, effects can be devastating.

It's not uncommon for families that earn a combined income of £13,000, to find themselves in a position where they face demands for repayments of more than £2,500, which officials say must be paid back out of their monthly income.

The Inland Revenue, which administrates tax credits, is under pressure to make sure people who claim more tax credits than they are due are forced to make repayments.

Tax inspectors were criticised by the National Audit Office earlier this year for failing to claw back up to £2bn of tax credit overpayments. In its annual report last month the NAO said the system remained chaotic and refused to give official sanction to the Revenue's accounts.

In response to the dire situation some families find themselves in, tax experts have urged families with tax credit overpayments to check their records before agreeing to pay the money back.

They argue families could escape making repayments because the fault often lies with the Inland Revenue, which has found many of its calculations are wrong and misled many claimants with badly worded claim forms.

Accountants said the situation could get worse. They signalled that a cosy Christmas is likely to be followed by a wave of investigations to discover if claimants have been given the right amount of money.

Dummy guide: Tax Credits

Tax credits are worth £4.8bn and benefit almost six million families. A low income family with two young children in childcare can be thousands of pounds better off a year.

Child Tax Credit: nine out of 10 families with children are eligible for CTC, which is paid in addition to Child Benefit. To very low income families with two children and a joint income of less than £10,000, the CTC is worth £3,800.

A family living on this money with three children would receive £5,430.If family income exceeds about £27,000, it drops to £545.

It runs out if joint incomes exceed £58,000 or £66,000 for families with a new baby (under one years old).

Working Tax Credit : goes to low-income working single people and couples, including those without children if aged over 25 and working at least 30 hours. It also reduces with rising income. It is paid in addition to child tax credit.

Childcare tax credit: is part of working tax credit. Parents can claim 70% of their childcare bill, with the maximum bill capped at £135 a week for the first child or £200 for two. So the value to parents is a maximum of £94.50 (70% of £135) if they have one child, or £140 if they have two. The tax credit is limited to two children. A family with two children, with a combined income of £15,000, pockets childcare tax credits worth £3,885. Put together with CTC, it gives them an income boost of £7,685. Broadly speaking, the credits start dropping significantly once household income goes over £20,000, and run out altogether on joint incomes above £25,000.

Eligibility for the tax credits is based on previous year's income. Single parents, or both parents, must be working at least 16 hours a week. The Inland Revenue, which administers the credits, says: "If actual income in the year of payment is very different, an adjustment is made, feeding into the following year's tax liabilities/credits."

You will need to show your income details (and those of your partner) for the tax year 2003-04, your national insurance number (and that of your partner). To help you claim, you (and your partner) should keep any information you have about your income for the tax year 2003-04, including the P60 tax certificate your employer gave you after the end of that tax year, and your form P11D or P9D (if you get one). If you were self-employed, details of your profits or losses for that year will also be needed.

Contacts : www.inlandrevenue.gov.uk/taxcredits or www.daycaretrust.org.uk>

A tax credits helpline is open 8am to 8pm seven days a week, on 0845-300-3900 (0845-603-2000 if you are in Northern Ireland). Daycare Trust runs a childcare helpline on 020 7840 3350 open for calls Mon-Fri, 10am to 5pm.