Tax credit shambles under fire

The Inland Revenue should consider overhauling the tax credit system because it pushes thousands of low income families into hardship, the chairman of a powerful parliamentary committee said this week.

Flaws in the tax credit system have hit tens of thousands of families, said Tory MP Edward Leigh. They have had to fight off demands, often incorrect, from the Revenue that they return overpayments.

Mr Leigh, chairman of the public accounts committee, grilled Revenue officials earlier this week about a surge in complaints, mainly from low income families who have claimed working tax credit and child tax credit since they took effect in April 2003.

He said he doubted if MPs would have voted for the new tax credits if they had known how many problems would continue to dog the system almost two years later.

Citizens Advice added to the calls for a full-scale review of the system and Revenue decisions to claw back overpayments of tax credits.

The charity said its bureaux have to deal with thousands of cases of overpayments caused by mistakes at the Revenue, or as a result of the taxman failing to respond when families tell them of changes to their circumstances.

Official figures show that by the end of December 2004 the Revenue had received 78,000 complaints about tax credit overpayments, which families said claim are caused by official errors. Of the 41,000 cases reviewed so far, only around 1,600 families have had their overpayments written off.

Yet computer errors are at the heart of many mistakes by the Revenue and have led to hundreds of thousands of tax credit overpayments, the charity said. One problem in the spring of 2003 caused 450,000 households to be overpaid a total of £94m.

In many cases reported by Citizens Advice bureaux it is unclear how overpayments have arisen, and people do not understand by how much their future payments will be reduced to recover these overpayments.

In some cases where people have queried the payment of large lump sums, they have received reassurance from the tax credits helpline, only to be later asked for the money back, the charity said.

"One couple with two children returned the £3,500 lump sum they believed they had received in error, but the Revenue insisted it was due and paid it a second time. When the couple once again returned the money, the Revenue contacted them insisting it was theirs and paid it a third time. A few months later the couple was informed they had been overpaid by £4,900," a spokeswoman said.

Tara Channing, who lives in Launceston, Cornwall, with her partner David Whale and three children, has been told she owes £2,400 in tax credit overpayments. Or it could be £1,600 depending on which letter is chosen from the bulging file in her living room.

Her problems date back to the inception of the tax credit system when she attempted to revise her claim. David suffered a severe back injury and was forced to quit his job. Like thousands of people who suffered at the hands of the tax credit system in its first year, her claim forms were lost and her case mishandled. During one three-month period she made 150 calls to the tax credit helpline.

Ms Channing has received compensation from the Revenue for the errors it has made and the distress it has caused. She has received letters admitting to mistakes. But still officials have refused to explain how the debt occurred and why the debt has not been withdrawn.

She first made an official complaint eight months ago. Officials have told her it is unlikely a decision will be made for several more months. Her only victory has been to stop further deductions from her income.

"When they were making deductions I was living on an income the government said was below the minimum poverty level," she says.

The Revenue says it will only cancel overpayments if families "could not have known they were being overpaid". They must prove this point during the appeal.

To make a complaint ask for form Cop1 at your local tax office, inlandrevenue.gov.uk or ring 0845 9000404 and the Revenue will send you a copy.