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Newsroom & speeches
19 September 2006
1. It is a pleasure to be here – and I would like to thank the Plymouth Welfare Rights Forum for inviting me to address this conference today. I want to take this opportunity to commend all the work you do in helping people across the city, and in making a very real difference. Getting the right support for people across Britain is a complex process, but this Forum has certainly demonstrated a degree of knowledge and experience that is invaluable. How we combine delivery of national objectives with delivery of local objectives is key.
2. What I want to do this morning is talk through this Government’s approach to tax credits – to demonstrate why they work, and why they are the right approach – and to then look at some of the specifics of what has happened over the last few years, for example with overpayments.
3. At the heart of the strategy is the eradication of Child Poverty.
4. Today, Tax credits help support 20 million people – 6 million families and just over 10 million children. Have no doubt - they have made a significant difference to the wellbeing of families and individuals across Britain.
5. It is important to keep sight of that. Take-up of tax credits is substantially higher than in any previous system of income-related financial support for in-work families who most need it.
6. In the first year of tax credits, 93% of families on incomes below £10,000 claimed their entitlement – compared to 50% in the early years of Family Income Supplement, 57% for Family Credit and at best, 65% for Working Families Tax Credit. Take up is around 80% across the board and 93% for those that need it most.
7. Right here in Plymouth, the latest statistics show that some 21,700 in-work families benefit from Tax Credits. That covers almost 34,000 children. 37% of the population in and around Plymouth are receiving tax credits.
8. Why has this worked? Well, this system has focused on – and delivered – three major goals. First, to improve incentives to work. Second, to reduce the tax burden on low to middle income families. Third, to dramatically reduce child poverty. We also wanted to remove the stigma associated with the old system of in- work and out-of-work benefits. Research demonstrates that we have achieved this and take up every year has increased.
9. Fundamentally, child and working tax credits are designed to support individuals – whether from unemployment into work, or as they build up their careers. They help parents have more choices for example between staying at home, part-time or full-time work.
10. But let me step back a moment. Tax credits, in the context of our wider economic stability, have contributed to an increase in the number of people in work by over 2 million since the Spring of 1997, with long-term unemployment reduced by some 450,000.
11. The South West provides a strong example where the employment level has reached record levels for the region, currently at 2.49 million, and has increased by 220,000 since April 1997.
12. Independent research shows that the poorest have seen their incomes rise, spending that increase on children’s clothes, food and holidays.
13. Tax Credits have had a real impact where it is most needed. Not just for poorer families, but also in reducing the tax burden on low to middle income families. Tax credits are inclusive - progressive universalism.
14. Indeed, the latest OECD study shows a large fall in the tax burden for low to middle income families – as a result of tax credits. The burden on a single-earner couple with two children earning £21,000 a year has fallen from over 17% of gross earnings back in 1997 to 9.8% in 2004 – the lowest rate of any G7 country.
15. In the UK, a single-earner family with two children can now earn just under two-thirds of the average wage before they start to pay any net tax. And tax credits have helped ensure that the number of families with children paying no net tax has risen from under 2.5 million in 1998 to over 3 million this year.
16. So this is about social justice, it is about being a country that helps those in need. It is about fairness. By tackling family poverty, the system works to make Britain a better, fairer place to live. The results are clear – 700,000 children lifted out of relative poverty since 1997, and tax credits has made a major contribution to this, compared to a doubling of child poverty in the previous 20 years. Now over 1.8 million fewer children in absolute low income families compared to 1997 on a before housing costs basis. The Government is committed to eradicating child poverty and tax credits is part of that strategy.
17. Without losing sight of the benefits the system has delivered, I now want to look at some of the specifics of what has happened over the last few years.
18. So let me begin with overpayments. Let me be clear on this. End-year adjustments are an integral part of a flexible financial support system. They are an integral part of a system that responds to families’ circumstances as they change.
19. Payments are based on household incomes which can of course change during the course of the year. And payments are therefore subject to adjustment during the course of the year and, if necessary, at the end of the year once these changes in incomes are known.
20. However, the Government has, and continues to, listen and respond to feedback. We announced a package of measures at the time of the 2005 Pre Budget Report to give greater certainty to families while maintaining the flexibility to respond to changing circumstances. This includes, and I’ll come back to this, an increase in the disregard from £2,500 to £25,000.
21. National Statistics show that end-year adjustments leading to an overpayment have fallen by a fifth from 2003/04 to 2004/05. And once the package of changes announced in the Pre Budget Report come fully into effect we expect the level of end-year adjustments to fall by a further third in future years.
22. The introduction of Tax Credits has been a huge undertaking for HMRC. It is the biggest single change to the welfare state since the Beveridge Reforms. Despite problems with the IT system in the early days, HMRC has made significant progress.
23. Last May, I set out a series of administrative measures designed to reduce the risk of errors, to clarify communications with tax credit recipients and to improve procedures for recovering overpayments.
24. And since then significant progress has been made in each of these areas. Building on the progress so far, major software releases were successfully implemented last November and this April, delivering real improvements in operational performance – not to mention in the service to claimants.
25. Improved performance of the tax credits system has meant that fewer overpayments are now caused by IT or administrative error – and this is demonstrated by the improvements made to accuracy in processing and calculating awards, which rose from 78.6% in 2003/04 to 97.7% per cent in 2005/06.
26. Since their introduction there have been clear procedures in place to ensure that recovery of overpayments does not create hardship.
27. And let me reaffirm today, these include reduced recovery rates for those on low incomes, and, for those who are no longer receiving an award, 12-month instalment plans with longer repayment periods where necessary.
28. On top of this HMRC will consider the case for making additional payments to those who claim hardship as a result of recovery.
29. So building on the progress made on administration, in PBR 2005 the Government announced a package of further improvements to the tax credits system.
30. The package struck a balance between providing more certainty and stability for families – particularly those on lower incomes – and maintaining the flexibility to respond to changes in income and family circumstances. I want to touch on some of these changes.
31. First, and as I referred to earlier, we announced an increase in the tax credits disregard from £2,500 to £25,000 – which addresses the impact of annual income rises that have led to the need for adjustment.
32. Second, families sometimes overestimate the extent to which their income has fallen when they seek extra support during the year. To address this, when claimants report a fall in income during the year, their tax credits payments will be automatically adjusted for the rest of the year to reflect their new income level – but will not include a one-off payment for the earlier part of the year. Instead the one-off payment will be payable at end of the year and balanced against any overpayment.
33. At the end of the year their award will be finalised when their actual income is know. If they have been underpaid, a further payment will be made in the ordinary way.
34. Third, HMRC will continue to make provisional payments at the start of the tax year based on information from the previous year until claimants submit renewal information. But to reduce the scale of subsequent updating, the renewal window has been reduced to five months, from six months. This means that awards are based on prior year data for a shorter period. We are also looking at ways of working with particular groups of claimants who may need more support.
35. This years renewals process is progressing well and the vast majority of claimants have already returned the necessary information to HMRC.
36. Fourth, there are sometimes delays in reporting changes in families' personal circumstances to HMRC. That’s why we announced greater responsibilities on claimants to report changes of circumstances, to ensure that delays in reporting do not lead to the need for subsequent adjustments. In addition, the notification period will be shortened.
37. Fifth, to reduce the impact of adjustments on family circumstances, automatic limits on the amount by which tax credit payments can be reduced to recover a tax credit overpayment will be introduced in November 2006.
38. HMRC listened carefully to requests from members of the consultation group to bring forward the PBR measure limiting the extent of in-year adjustments to people’s payments.
39. This November was the earliest possible date for bringing in an automated process but, recognising that big adjustments to payments might cause hardship in some cases, we extended the offer of additional payments to people facing hardship where their reduction in payments is a result of an income rise of over £2,500.
40. We also made those additional payments more generous in line with the new limits that will take effect from November 2006. HMRC are also doing more to remind claimants that these additional payments are available.
41. So I want to take this opportunity to stress that, eliminating the need for adjustments altogether would require a move to a fixed system where eligibility was based on the previous year's income and circumstances – a system where, as a result, flexibility would be diminished.
42. This flexibility to respond to changing circumstances is the key part of the system, especially in today’s modern labour market where in any single year three million people change jobs and 200,000 men and women who move into new or better jobs see their family income rise by more than £10,000.
43. Let’s not forget that a flexible system means financial support which is properly targeted and therefore fair for all.
44. Overall, these policy changes have been designed to minimise the need for adjustments while maintaining the flexibility to respond to reductions in income and changes in circumstances. And HMRC have worked closely in partnership with the voluntary sector to ensure that implementation of the PBR package fully reflects the needs of claimants.
45. I now want to turn the importance of communication with individuals and advisory bodies on tax credits. From this April, award notices have been revised, listening to the requests of the voluntary and community sectors. They now include a clearer summary of what will be paid and, for the first time, an explanation of how this has been calculated.
46. The guidance notes sent to claimants with their award notices have also been improved and reduced. Again, since April, claimants have received a two-page summary explaining the most important aspects of their award and telling them what information on their award notice they need to check.
47. Since then, HMRC has reduced the number of unnecessary award notices issued. Today, notices are no longer issued following notification of a change of address, for example.
48. We’ve also worked on the quality of helpline services. This current year, 98% of callers have been answered on the day. HMRC is building on that, seeking to further improve the quality of helpline service through improved guidance and training for staff and by learning from feedback from voluntary organisations, and claimants
49. You will know that HMRC offer a special tax credits helpline number to welfare rights groups – which handled over 50, 000 calls last year and rising.
50. We’re advertising too, to make claimants aware of their entitlements – for example with the “tax credits take-up resource pack” produced by Citizens Advice for its advisers, but funded by HMRC.
51. But we also need to give greater support to the most vulnerable claimants. We are looking at how we can improve the system for them. I certainly hope that from later this year HMRC will be taking claims by phone from Citizens Advice, enabling such claims to be put into payment more quickly.
52. That’s where we are today. We’ve worked hard to improve our communications, to improve our IT, to improve our administrative processes. I continue to believe that tax credits are working. That is what the independent research is telling us. The principle is the right one and they have removed the stigma.
53. The Government has held consultations and listened. The system, in the main, is working now. Important that engagement with the voluntary and community sector continues.
54. And looking to the future, I want to assure you all that we seek an even more personalised approach, tailored to individual needs. We seek to ensure that HMRC develop administrative processes that reflect their enhanced understanding of the needs of claimants, and that HMRC successfully develops a more tailored service for tax credits claimants.
55. So I welcome this conference, and I welcome the continued attention and hard work that members of this forum have put into this matter. I know we will continue to work in partnership to ensure the system continues provide the real support that Britain needs today.
56. Thank you.
