Lib Dems call on National Audit Office to investigate tax credit cover up

5.52.04pm BST (GMT +0100) Wed 28th Sep 2005

Liberal Democrat Shadow Work and Pensions Secretary, David Laws MP has written to Sir John Bourne, head of the NAO urging him to investigate the Revenue's accounting of tax credits, because of the suspicion that the full extent of overpayments is being covered up.

There are two types of tax credit overpayment - those recovered at year-end after the award is finalised, and those recovered in-year.

Information on overpayments recovered at year-end became available for 2003/04 on 1st June 2005 - these statistics showed that a third of all families, nearly 2 million in total, had to repay £1,028 on average of their award.

But despite a series of Parliamentary Questions aimed at drawing out information on in-year overpayments, no information has been provided by the Revenue. The typical response is that no records are kept of overpayments recovered in-year because this is considered to be 'part of the normal operation of the tax credit system'.

David Laws said:

"The Revenue has blocked at every turn questions about these awards. Either they are hiding the extent of the problem or they are guilty of an incredible failure in accountability.

"The Revenue's behaviour is unacceptable because it is the in-year recovery of overpaid tax credits that frequently causes the most hardship, frustration and despair for recipients."

Why recovery in-year of overpayments can be a particularly severe problem:

The recovery in-year of overpayments can be a particularly severe problem - more severe even that year-end recovery - because recovery rates are not linked to a family's income.

For overpayments determined at year-end there is a limit on the amount by which weekly or monthly payments can be reduced - the rate is linked to family income (10% for families on lowest incomes receiving a maximum award; 100% for families on the highest incomes - those receiving only the family element of Child Tax Credit; and 25% for everyone else).

There is no limit on the amount an award can be reduced when the overpayment is recovered in-year. The automated tax credit IT system is designed to adjust awards (reducing future payments or stopping them altogether), so that the overpayment is recovered before the end of the financial year.

The severity of this particular problem is well documented in paragraphs 5.22 - 5.27 of the Parliamentary Ombudsman's report Tax Credits: Putting Things Right from 21 June and in paragraph 6.15 of the CAB report Money with your name on it? from 22 June.

The CAB report also makes the point in paragraph 6.25 that identical problems of severe hardship being caused by in-year adjustments have occurred for 2004/05.