Julian Knight: The intention was great but the execution is a scandal

Amid the furore over Chancellor Alistair Darling's "magpie" pre-Budget statement, two damning reports on the tax credit fiasco barely got a look-in last week.

But the credits affect the everyday lives of up to six million British families – far more than will have to deal with inheritance or capital gains tax.

The two reports – one from charity Citizens Advice and the other from Parliamentary Ombudsman Ann Abraham – paint a picture of a tax credit system that is still driving thousands of families into debt and despair. And just as depressing is that both the charity and Ms Abraham have said all this before.

Previously, vast improvements were promised by HM Revenue & Customs (HMRC) and ministers. Yet judging by letters to this newspaper, the nightmare continues. Here is one gem cited by Ms Abraham. It centres on the application, by HMRC officials, of the "reasonable belief test" – or whether recipients could really think overpaid tax credits were theirs.

In this case, a claimant actually called HMRC to check the accuracy of a credit award and was assured that all was fine. But later the individual was told a mistake had been made and the cash had to be repaid. A bright spark at HMRC argued that the claimant's decision to check the award meant they could not reasonably believe it was theirs. A catch-22 worthy of the pen of Joseph Heller. Sadly, such tactics aren't out of the ordinary as some HMRC staff look to shift the blame for mistakes on to claimants.

The intention behind tax credits is spot on. It was one of the great inequalities of the Tory years that many families were better off on benefits than in work. But the delivery is a scandal: a third of all tax credits were overpaid in 2005-06 at a cost of more than £1.5bn.

Again, HMRC promises that improvements are just around the corner. It is increasing something called "income disregard". In English, this means claimants would have to inform HMRC only if their income had gone up by over £25,000 during a tax year, rather than £2,500 as previously. But even the taxman reckons this will cut overpayments by only a third.

As in the case of the now-defunct Child Support Agency, the debacle will run for years. An alternative could be to boost the personal income tax allowances of people with children – a change under which some poorer families would lose and richer ones benefit unjustifiably. But at least such wheezes as the "reasonable belief test" would be jettisoned.

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