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John Andrews of the Low Incomes Tax Reform ( www.litrg.org.uk ) highlights some positive news on the tax credits front.

Tax credit overpayments

Figures for tax credit overpayments were published today and they showed a fall.

Even more significantly, HMRC have published a discussion document looking at possible amendments to the tax credits regime to make it more customer-friendly.

Tax credit overpayment figures were published today by HMRC which show that the level of overpayment has fallen between 2005/06 and 2006/07, the period which covers the increased income disregard (this moved up from £2,500 to £25,000).

The amount overpaid in 2005/06 was  £1.7 billion, which fell to  £1.0 billion in 2006/07. There were 1,902,000 awards overpaid in 2005/06 and 1,291,000 in 2006/07. Over one in five awards was overpaid in 2006/07.

Overpayments are normal

Overpayments are a normal part of the tax credits system, the key question is whether any particular overpayment was expected by the claimant and did it arise through normal processes? If the answer to both is “yes", the system is likely to be working for that claimant.

Very often that has not been the case in the first five years and HMRC errors and poor communications have driven much of the dissatisfaction that has built up.

We still believe that much more could have been done to wipe the slate clean in respect of debts which accrued through errors and misunderstandings in the early years of the system. It would have given those claimants a completely different perspective and a way out of the long-term debt with which they are now shouldered.  The more time that passes, the less likely is any action to be taken for these unfortunate people who are locked into situations not of their own making.

So if the past is set, then the future must offer more hope. Certainly many claimants or potential claimants would be comforted if they thought they were about to engage with the “New Improved Tax Credits" and not some patched-up old version.

Discussion document

This is why the discussion document, Tax credits: improving delivery and choice ( link to HM Treasury website where document is available for download as a .pdf ) is to be welcomed as it shows the government mind is not closed to further improvements.

The government is aiming to do three things:

• continue to improve the service HMRC provide to the diverse range of people receiving tax credits by tailoring support more closely to individuals' needs, to make the process of claiming, receiving and renewing tax credits easier for customers and to reduce the scope for error;
• give customers more control over their tax credits affairs, by providing them with greater certainty about their awards, and more choice about how they receive tax credits and how they repay any overpayments that might arise, while continuing to provide additional support where their income falls or their circumstances change. While the proposals outlined at this stage to give customers more choice are relatively modest, they could inform the direction of future policy development; and
• set out a range of possible options to simplify the delivery of childcare support through tax credits, to further reduce customer error.

Which is most important?

All the potential reforms are important. In the short term we think the agenda covered by the first bullet is the most important. Confidence in the current system must be established, especially, if in the same timescale, we are going to see an economic downturn.

This is most important for those customers of HMRC with complex and often chaotic lives. HMRC must pick up the challenge of communicating with these customers in ways that they can understand. This will cost more money; but it would be money well spent.

There are still further short to medium-term improvements that should be made which are not directly addressed in the consultation and we will be drawing these out in our response. We also feel that the government should not rule out more radical change without a detailed review of alternatives.

We will be studying the proposals in detail over the coming weeks. We welcome suggestions from visitors to our website. ( www.litrg.org.uk )