Tax credit problems put anti-poverty policies

Press Releases > Tax credit problems put anti-poverty policies

22nd June 2005

The Government's flagship tax credit scheme is backfiring for large numbers of families, according to a report published today by national charity Citizens Advice.

Tax credits offer substantial extra cash to low-income families [1], but poor administration and system failure have plunged many below the breadline and into mounting debt.

Many families on low incomes rely absolutely on tax credits, to support children and to sustain low paid work. But recovery of overpaid tax credits has left families with incomes as low as £56 a week plus child benefit, with no tax credit payments.

Money with your name on it?, based on the 150,000 tax credit problems handled by Citizens Advice Bureaux in 2004/2005, shows that some families have been left in severe hardship as substantially reduced incomes lead to serious debt and threaten families' basic financial security.

In the most extreme cases, CAB clients have been threatened with repossession or eviction. Some have had to give up work because they were unable to pay for childcare. CAB advisers have had to arrange Salvation Army food parcels for families left without enough money to eat.

Tax credits staff have even told some families they must take out high-cost loans to repay overpayments.

Payments are supposed to be responsive to falls in income or other changes affecting entitlement, but the system is complex to understand and administer. Incomprehensible and contradictory award notices have meant many people cannot understand their entitlement or spot errors frequently made on their awards.

CAB advisers have found it impossible to resolve even simple problems, because tax credit IT systems have left Helpline advisers unable to provide accurate information, and because letters have gone unanswered, sometimes for months.

The net result is growing disillusionment with tax credits, putting at risk the success of key government policies on promoting work for low income families - including lone parents and disabled people - eliminating poverty, and increasing peoples' capacity to save.

Citizens Advice has welcomed the government statement of 26 May 2005, which recognised the need for improved administration and measures to promote better understanding of tax credits on the part of claimants, but it is concerned that some of these changes could be 18 months away.

It says a new approach is needed urgently, which recognises that tax credit payments should not be withheld to leave families in poverty. Key recommendations include:

Citizens Advice Chief Executive David Harker commented:

"Tax credits are intended to combat poverty by providing a guaranteed stable income, and many of the poorest families rely absolutely on them. But our report shows the system is failing the very families most in need of extra money, causing hardship the system is designed to prevent, and making it more difficult for people to save or to hold down a job, rather than supporting saving and employment.

"The stakes are high for those who rely on it the most. The scale of official error has been completely unacceptable and the Revenue has failed to live up to its own standards of service and efficiency. We welcome the new determination that is being shown to improve tax credit administration, but there is a long way to go. There needs to be urgent improvement in tax credit administration if the scheme is to achieve its anti-poverty objectives and not frustrate them. The challenge now is to make the changes necessary to restore public confidence in tax credits and make the system work properly for those who really need it."

Cases seen by Citizens Advice Bureaux include the following:

A working couple with two children who consulted a CAB were getting no help towards childcare costs of £550 a month and were facing repossession as a result of problems caused by the rate of recovery of tax credit overpayments.

A lone parent who called at a CAB late one Friday after her weekly child tax credit payments stopped without warning had just £2 to get home and buy food for two children and herself. Her working hours had reduced because of serious ill-health, and although she had contacted the tax credit office several times about her change in circumstances, her claim was in a total mess.

A lone parent received no tax credit payments for the last few weeks of the tax credit year, and the CAB had to give her a food parcel from the Salvation Army to feed her children. She had spent her last money on gas and electricity meters and baby food.

A woman who made an honest mistake on her application form was informed by tax credit compliance officers that she owed £14,000 and would also be charged a £3000 penalty, plus interest. Revenue compliance officers advised her to take out a loan from a high street bank as interest rates would be lower than those charged by the Revenue.

[1] Currently 6.1 million families containing 10.3 million children have been awarded tax credits, and the total paid out last year amounted to £13.6 billion. For those on the lowest incomes a tax credit award, including money towards childcare costs, can be worth a substantial part of their weekly income. For example, a lone parent with one child could be entitled to over £10,000 in tax credits if she works 20 hours a week earning the minimum wage and paying for childcare.

Last updated: February 23, 2007