Iain Duncan Smith Bemoans Tax Credit System – But Is He Right?

by richardhutton

At the end of December 2012, the Secretary of State for Work and Pensions Ian Duncan Smith wrote an article for the Telegraph, decrying the Tax Credits system as “not fit for purpose”, prone to widespread fraud, and an arrangements which punishes “hard-working taxpayers”[1].

Tax Credits are a form of financial support for people in work, and on low wages. They were introduced by the UK government in 2003 – replacing Working Families Tax Credit, with Working Tax Credit and Child Tax Credit[2]. This form of social protection exists because for many people, even paid employment does not see their financial circumstances become secure. Its purpose was to offset low wages, “provide support to parents returning to work”, and to “reduce child poverty”[3]. Needless to say, Duncan Smith does not acknowledge this; instead, he claims that it “increased people’s dependency on the state”[4]. He also failed to recognise any distinction between fraud and error, reiterating the same basic claim throughout his piece[5]:

“Labour’s legacy on tax credits tells a sorry story of dependency, wasted taxpayers’ money and fraud…far too much of that money was wasted, with fraud and error under Labour costing over £10 billion…It will come as no surprise therefore that fraudsters from around the world targeted this benefit for personal gain…little attempt was made to clamp down on potential fraudsters”[6].

In reality, as of 2011, HM Revenue and Customs reported that: “the level of error and fraud was around 8.1% of finalised tax credit entitlement”[7]. Of this, fraud accounted for c. 2.4% of overpayment[8]. In all cases, customer error was responsible for the vast majority of overpayment: c. £1.6 billion overpaid due to error as opposed to c. £670 million due to fraud. Customer error also saw c. £190 million underpaid; while HMRC error was responsible for c. £40 million being overpaid, and the same amount being underpaid[9].

The largest amount of estimated error and fraud which saw claimants overpaid was among people who were in work, and had dependent children: accounting for £1.61 billlion, out of the total overpayment of £2.27 billion. They were also the people most likely to be underpaid: by £130 million, out of £230 million. Customer error was primarily due to undeclared partners, and changes in circumstances with regard to children and working-hours[10]. It is worth considering what this means for people who are overpaid. In 2006, the Auditor General was quoted in the Telegraph criticising the Tax Credits system, but for a reason very different to Duncan Smith:

“The thing about tax credits, and I find this just incredible, is the failure of imagination and of sociological competence…A scheme has been designed in which we over-pay a lot of poor people, who often have trouble managing money. So when we later demand repayment, that causes a great deal of anguish”[11].

So, to a degree, Duncan Smith is right: the Tax Credits system is faulty – but not in the way that he implies. Moreover, Duncan Smith was writing his piece to make a case for replacing the Tax Credits System with the Universal Credit system:

“Universal credit is designed to make work pay at each and every hour – 1.5 million people will keep more money as they increase their working hours, on average seeing an extra 14 pence in their pocket out of every single pound earned. This is a dynamic reform, which will benefit hard-working people across the country”[12].

Again, this is an obfuscation of the truth. Under Universal Credit, some people stand to benefit from increased financial support – however, c. 200,000 families with people in work, on low incomes, will potentially lose £3,870 per year in working tax credits unless they can increase the number of paid hours they work, in order to meet the government’s new eligibility requirements. This will see social protection cut, drastically, to people who are only able to work part-time – c. two thirds of these families already live in poverty[13]. In an era of mass unemployment, in the middle of a recession, it fails a basic test of logic to make increased working hours a condition of financial support. It is therefore false for Duncan Smith to claim that:

“This Government is on the side of hard-working taxpayers, the people across the country working in the private and public sectors who have seen their pay frozen or cut, as businesses have struggled to keep them in work. And all the while these people have watched those on tax credits or benefits see their income rise, outstripping their earnings”[14].

All Working Tax Credits are paid to people who work, as their title suggests. Child tax credits are also payable to people who work, likewise. Clearly, social protection is going to be reduced for families who depend upon it the most, in order to avoid further destitution.

There are faults with the Tax Credits system – but these are not due to scope for widespread fraud, which is minimal. They are due to error – much of which seems unavoidable, because it can only be assessed retrospectively. The Tax Credits system is designed to respond to changes in income and circumstances as they occur. A family’s award is based on their circumstances at the time of application – for example, the number/age of children, and their level of income: these factors are always potentially subject to change. Universal Credit applies the same system: it only differs in that it is designed to penalise people who suffer wage cuts/reduced incomes, by lowering the amount of financial support they receive. It is also designed to reduce social protection to people in part-time work, or self-employment: those who need it the most.

 

 

Further Reading:

 

‘’Universal Credit: Disabled people ‘to lose out’ by BBC, 17th October 2012: http://www.bbc.co.uk/news/uk-politics-19966370

‘Tax Credits: Policy Issues Of Unison’ by Peter Kenway and Guy Palmer/New Policy Institute (No date – c. 2003): http://www.poverty.org.uk/reports/tax%20credits.pdf

‘Changes to the Working Tax Credit hours rules for couples with children from April 2012’ by Steven Kennedy/House Of Commons Library, 26th March 2012: http://www.parliament.uk/briefing-papers/SN06267

‘Tax credits: effect of Budget changes from 6 April 2012’ by HM Revenue and Customs: http://www.hmrc.gov.uk/taxcreditsbudget/index.htm

‘Child Benefit, Child Tax Credit and Working Tax Credit Take-up rates – 2010-11’ by HM Revenue and Customs, 2012: http://www.hmrc.gov.uk/statistics/fin-takeup-stats/cwtc-take-up.pdf

‘Child and Working Tax Credits Statistics: Finalised annual awards – 2010-11’ by HM Revenue and Customs, 2012: http://www.hmrc.gov.uk/statistics/fin-main-stats/cwtc-awards.pdf

‘The Life and Death of Child Tax Credit and Working Tax Credit’ by Michael Godwin and Colin Lawson/University of Bath Department of Economics, (no date – c. 2012): http://www.bath.ac.uk/economics/research/working-papers/2012-papers/01-12.pdf

 

 

 


[1] ‘Iain Duncan Smith: we’ve brought back fairness to welfare’ by Iain Duncan Smith/Telegraph, 30th  Dec 2012: http://www.telegraph.co.uk/news/politics/9772131/Iain-Duncan-Smith-weve-brought-back-fairness-to-welfare.html

Duncan Smith’s case rests on a variety of sums/data, all of which are unreferenced. I couldn’t locate the relevant sources for these.

[2] ‘Tax Credits: Policy Issues Of Unison’ by Peter Kenway and Guy Palmer/New Policy Institute (No date – c. 2003): http://www.poverty.org.uk/reports/tax%20credits.pdf

[3] HM Revenue and Customs has an extensive section on what Tax Credits are: http://www.hmrc.gov.uk/taxcredits/start/who-qualifies/what-are-taxcredits.htm

See also ‘Child and Working Tax Credits: Error and Fraud Statistics – 2010-11’ by HM Revenue And Customs, 2012: http://www.hmrc.gov.uk/statistics/fin-error-stats/cwtcredits-error.pdf

[4] ‘Iain Duncan Smith: we’ve brought back fairness to welfare’ by Iain Duncan Smith/Telegraph, 30th  Dec 2012: http://www.telegraph.co.uk/news/politics/9772131/Iain-Duncan-Smith-weve-brought-back-fairness-to-welfare.html

[5] This conflation was echoed by an unreflective reaction in the Telegraph. See ‘Britain hit by £10bn tax credit fraudsters, claims Duncan Smith’, by Robert Winnett/Telegraph, 30 Dec 2012: http://www.telegraph.co.uk/news/politics/9772132/Britain-hit-by-10bn-tax-credit-fraudsters-claims-Duncan-Smith.html

[6] ‘Iain Duncan Smith: we’ve brought back fairness to welfare’ by Iain Duncan Smith/Telegraph, 30th  Dec 2012: http://www.telegraph.co.uk/news/politics/9772131/Iain-Duncan-Smith-weve-brought-back-fairness-to-welfare.html

[7] ‘Child and Working Tax Credits: Error and Fraud Statistics – 2010-11’ by HM Revenue And Customs, 2012: http://www.hmrc.gov.uk/statistics/fin-error-stats/cwtcredits-error.pdf

[8] Table 3 in ‘Child and Working Tax Credits: Error and Fraud Statistics – 2010-11’ by HM Revenue And Customs, 2012: http://www.hmrc.gov.uk/statistics/fin-error-stats/cwtcredits-error.pdf

[9] These sums are the central estimate: Revenue and Customs have three estimates – Lower Bound, Upper Bound, and Central Estimate which is the mean average of the other two.

[10] ‘Child and Working Tax Credits: Error and Fraud Statistics – 2010-11’ by HM Revenue And Customs, 2012: http://www.hmrc.gov.uk/statistics/fin-error-stats/cwtcredits-error.pdf

[11] In ‘Brown fails the Auditor-General’s tests’ by Liam Halligan/Telegraph, 23rd July 2006: http://www.telegraph.co.uk/finance/2943945/Brown-fails-the-Auditor-Generals-tests.html

This is a problem likely to be exacerbated by Universal Credit, as payments become monthly, and housing benefit is no longer paid to landlords.

[12] ‘Iain Duncan Smith: we’ve brought back fairness to welfare’ by Iain Duncan Smith/Telegraph, 30th  Dec 2012: http://www.telegraph.co.uk/news/politics/9772131/Iain-Duncan-Smith-weve-brought-back-fairness-to-welfare.html

[13] ‘Two thirds of families about to lose tax credits are already living in poverty’ by The Union of Shop, Distributive and Allied Workers, 20th March 2012: http://www.usdaw.org.uk/newsevents/news/2012/mar/twothirdsoffamiliesabout.aspx

See also: ‘Working tax credit changes are ticking timebomb, says campaigners’ by Caroline Davies and Patrick Butler/Guardian, 30th March 2012: http://www.guardian.co.uk/society/2012/mar/30/working-tax-credit-changes

[14] ‘Iain Duncan Smith: we’ve brought back fairness to welfare’ by Iain Duncan Smith/Telegraph, 30th  Dec 2012: http://www.telegraph.co.uk/news/politics/9772131/Iain-Duncan-Smith-weve-brought-back-fairness-to-welfare.html