Constituency casework: tax credits

Tax credits - the Child Tax Credit and the Working Tax Credit - were introduced in April 2003 to “tackle child poverty and help to make work pay”. As of 1 December 2012, 4.7 million families containing 7.8 million children were receiving tax credits. Total expenditure on tax credits in 2011-12 was £29.8 billion.

Tax credits are administered by the Tax Credits Office, part of Her Majesty’s Revenue and Customs (HMRC). Awards are calculated on an annual basis, but may be reassessed during the year if a family’s income or circumstances change. While the system is linked to the tax year and uses information collected for income tax purposes, tax credits are quite separate from the tax system and share many features with means-tested social security benefits.

The Government argued that tax credits would provide a secure stream of income for families with children, whether in or out of work, while tackling poor work incentives. A common framework based on annual assessment, it was argued, would result in a fairer and more transparent system, with less form-filling and simpler administration, while still being responsive to changing needs and circumstances. However, huge problems were encountered from the outset and in the first year nearly two million families were overpayed a total of £2.2 billion. The Labour Government responded with a series of measures to tackle administrative and IT problems, and changes to the tax credit rules themselves. The operation of the tax credits system has improved, but overpayments of £1.8 billion were still incurred in 2011-12. HMRC’s policy on recovering overpayments from claimants continues to cause controversy.

Tax credits – along with various means-tested benefits for families of working age – are being replaced by Universal Credit, although the new benefit is not expected to be fully phased in until 2017. The current Government has brought in a package of tax credit changes aimed at “controlling the costs of tax credits” in order to “provide a fair and affordable platform for the introduction of the Universal Credit”. Further measures aimed at tackling error and fraud and recovering tax credit debt were announced in the 2012 Autumn Statement. Taken together, the tax credits measures announced since the Government came to power are expected to yield savings of around £4.9 billion a year by 2014-15.

This note gives a brief overview of the tax credits system and changes to the system under the current Government. It also outlines the avenues available to people seeking to challenge decisions on entitlement to tax credits or about the recovery of overpayments, or who wish to pursue more general complaints.