|
Observations
on tax credits. By Donald Hirsch
Gordon Brown's pre-Budget report provoked howls of derision for its
downwardly mobile growth forecast and murmurs of approval for measures to
improve the housing supply that might in time help upwardly mobile young
families. But there was no cheer in parliament, and limited coverage in the
press, for one untrailed and important change that is likely to have a direct
effect on the lives of millions.
This was a change to the tax credit regime, the system that is designed to
lift children out of poverty but which to date has been so plagued with
difficulties that many of its intended beneficiaries hate it with a
vengeance.
Tax credits top up the incomes of low-wage workers and provide financial
support at unprecedented levels for poorer parents in and out of work. Three
million families get £35 a week per child, plus £10.50 per family, on top of
child benefit and up to £31 in earnings top-up.
Reforms in 2003 made tax credits less like old-fashioned benefits by
calculating them annually within the tax system. This was supposed to help
make support less narrowly intrusive: poor people were not only to be treated
more generously, but also to be treated more like grown-ups.
The system has been plagued by administrative and computer errors, by poor
communication and by complexity. Two years in, both the Citizens Advice
Bureau and the parliamentary ombudsman were reporting that tax credit cases
were by far the commonest items in their caseload.
The central problem is overpayments, requiring people on low incomes to repay
large sums. In the first year about one-third of clients were overpaid, an
alarming 630,000 of them by more than £1,000. Repayment can cause acute
hardship - that is, it can contribute to the precise problem that tax credits
are designed to tackle.
The Revenue is trying to speed up assessments in order to avoid overpayments
based on out-of-date assumptions, but up to now a certain amount of
overpayment has been inevitable, no matter how good the administration.
Awards are initially based on the previous year's income, but if someone in
the family gets a job halfway through the tax year the entitlement for the
whole year is reduced. Once the family's income rises by £2,500 the Revenue
can claw back previous payments.
The centrepiece of this month's reforms has been to increase this
"disregard" of income rises to £25,000. This means that about 95
per cent of those on tax credits will not have them adjusted if their income
rises, until the following year.
Thus overpayment is no longer built into the system. However, it will still
occur, potentially on a large scale, for two main reasons. One is that the
calculation of each year's entitlement occurs after the start of the
financial year, so run-on payments from the previous year may be too high.
The other is that when family circumstances change - for example, when a lone
parent moves in with a new partner - entitlements change, too, and
overpayments can occur while the system catches up. To avoid both these
problems, claimants will be required to give more information more promptly
to the Revenue, which in turn will need to be more prompt in processing it.
The Treasury and the Revenue want to persuade people that reporting more
information, more frequently, is in their own interests - a tough message to
get across, requiring trust in government from people who feel badly let down
by it at present.
The pre-Budget report also announced that HM Revenue and Customs has managed
to shed more than 3,000 staff in "efficiency savings". For fewer
staff to deliver a prompter and friendlier service is a huge challenge, but
the stakes are high.
|
