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UK Treasury May Write Off Half A Billion After Tax Credit Legal Blunder

by Robert Lee, Tax-News.com, London

03 September 2007


The UK government will reportedly be forced to write off GBP500 million because officials attempting to reclaim money in overpaid tax credits did not follow the correct procedure.

According to the Daily Telegraph, a spokesman for HM Revenue & Customs reportedly confirmed that recovery officials had breached Section 18 of the Tax Credits Act 2002 by failing to inform claimants that their cases were under review. It has been estimated that this could affect up to 250,000 cases, but HMRC has insisted that 90,000 of these can be rectified.

The blunder came to light when an HMRC whistleblower leaked information on the cases to the opposition Conservative Party. HMRC has refused to put a figure on the monetary value of the tax credits involved, but the informant reportedly told the Tories that GBP500 million may have to be written off or paid back to claimants, with an additional GBP200 million being wasted in officials' time to rectify the problem.

The tax credits system was the ruling Labour Party's flagship policy to boost the incomes of millions of low paid families, but it has been beset with problems from the off, with hundreds of thousands of families and individuals having been overpaid and then forced to pay back the excess money. Critics of the system blame its complexity for many of the problems, particularly its extensive use of means testing, and complicated rules which are simply not understood by millions of claimants.

According to a report issued in May 2007 by the Commons government spending watchdog, the Committee on Public Accounts, in 2003–4, between GBP1.06 billion and GBP1.28 billion (8.8 to 10.6% by value) was incorrectly paid to claimants, bringing overpayments in the first three years of the tax credit system to GBP5.8 billion.

However, the extent of the government's losses as a result of the ongoing fiasco may be much more severe than first thought, according to figures published by the opposition Liberal Democrat Party in the same month. Their figures suggested that the government had overpaid GBP1.7 billion in tax credits in 2005/6, bringing the grand total of overpayments since the scheme was introduced in 2004 to GBP5.7 billion.

The Public Accounts Committee heard that the tax credits system suffers from the highest rates of fraud and error in the public sector. Much of the blame for the system's failings was initially placed at the door of EDS, the American IT systems firm contracted to build the tax credits computer system. However, according to Edward Leigh, Chairman of the Public Accounts Committee, government attempts to improve the system have been woefully ineffective in the intervening four years.

HM Revenue and Customs has paid out GBP47 billion under the current tax credit system in the three years since it was introduced.


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