According to research carried out at Bangor University, the tax credit system is not alleviating financial hardship for predominantly vulnerable claimants, but often has the opposite effect.
Our ongoing study, examining the administration of the tax credit system by HM Revenue & Customs officials and its effects on claimants, suggests one of the main reasons the system does not meet its objectives is the constraints – particularly those relating to the performance management system – put upon HMRC officials.
Like most departments, HMRC uses a guided distribution element within its performance management system, categorising officials on whether they have "exceeded" or "met" their targets at work or if they "must improve". The Cabinet Office has recently said it will give individual departments the option to take up or drop “guided distribution”, and our study suggests that there could be policy as well as personnel benefits if HMRC is to drop this element.
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Tax credits are paid to people whose income is below a certain level. We found they can cause financial hardship when individuals are required to pay back a tax credit overpayment, caused by either claimant error, fraud, or HMRC errors.
"HMRC officials lack time and discretion"
Overpayments constitute considerable amounts of money for claimants who tend to have little disposable income. It is the claimant's responsibility to challenge and appeal against overpayments, if they believe them to be incorrect. While some claimants successfully challenge overpayments, many of them, in particular claimants with disabilities or learning difficulties, end up giving in and having to pay up to £12,000 or more back to HMRC.
Claimants find it difficult to challenge overpayments because officials do not provide them with the information and support they need to understand the nature and cause of overpayments and their calculations.
Preliminary findings show that this worsens financial hardship for claimants, particularly vulnerable claimants, often resulting in depression, anxiety and feelings of low self-worth. One claimant and her children ended up living on beans on toast for several months to survive. Other claimants are forced to depend on crisis loans and food banks.
The study finds that officials are not forthcoming with explanations of tax credit awards and overpayments to claimants. Officials lack time and discretion due to two constraints. Firstly, the disaggregation of tax credit claim information between different departments and teams makes it hard for officials to have a full view of the individual's circumstances.
Secondly, the constant surveillance and assessment by performance management systems profoundly affect officials who feel “pressured” and “frustrated” at work. The following are quotes from HMRC officials who responded to our study:
“If you spend the time to actually give them [claimants] the right advice, explain to them what went wrong, and how to avoid it next time, they [management] will feel you’ve spent too long. The computer will say you’ve spent too long or how you need to behave next time. [You] get marked down."
“It was soul destroying […] People monitor you by the second, how long you are away from your desk, and [whether] you took too long writing that note."
As a result, the tax credit system becomes dysfunctional for both claimants and HMRC officials. Claimants suffer because they experience financial hardship, serious mental and emotional distress, and reinforcement of social stigma and inequality. Officials also suffer through stress and frustration and feel they are not doing their job properly.
Our findings suggest that the tax credit system does not meet its original policy aims of alleviating financial hardship and reducing child poverty, particularly for the most vulnerable families and individuals.
Fixing the performance evaluation system would provide part of the solution, because it would allow officials to spend more time with claimants and not feel under so much pressure to hit performance targets.
What is more, reintroducing a more holistic approach toward tax credit cases would give officials an overview of the specific circumstances of individual claimants. This would give officials access to relevant information, allowing them to explain the reasons for the overpayment and offer solutions.
Crucially, a more holistic approach would be part of a more fundamental transformation toward a "relational" system grounded in mutual respect, empathy and empowerment rather than individual responsibility, performance and one-directionality.
Our study calls for policy makers to pay attention to the impact the administration of the welfare system has on both claimants (particularly vulnerable claimants) and government officials. Making changes to performance evaluation systems with its “guided distribution” element would constitute the first step in the right direction.