Families hit by tax credit red tape
More than 500,000 households must now send proof to HMRC of their childcare spending
More than half a million families will be made to prove to tax inspectors how much they are spending on childcare or whether their children are in full-time education under new rules buried in the small print of George Osborne's Autumn Statement.
Some 80,000 households which claim child tax credits for pre-school children will have to send evidence to HM Revenue and Customs (HMRC) of the amount they are paying a nursery, child-minder or nanny over a 10-week period. A further 500,000 families with youngsters aged between 16 and 19 who are in full-time education and are therefore eligible for child tax credits will have to send proof, in the form of letters from schools or colleges, to HMRC, rather than "self-certify" as they do now.
The Chancellor estimates the new rules will recoup £315m in overpayments in tax credits in the year 2014-15, a further £185m in 2015-16 and £85m the following year. Fraud and error in the tax credits system last year cost the Treasury more than £2.2bn, and Treasury sources said there needed to be tougher measures to claw back taxpayers' money.
Yet there were warnings last night that the new rules would deter some parents – who are at the lower end of the income scale – from claiming tax credits because of the onerous and complex paperwork.
The new rules follow measures imposed on higher earners to provide paperwork to tax inspectors on child benefit. From next month, parents who earn more than £50,000 will lose most of their child benefit and must send payslips or bank statements to HMRC in order to claim back some of the money. Child benefit is being axed altogether from households where one earner is on a salary of more than £60,000.
Together, the new rules will force hard-pressed and busy parents to become "kitchen-table accountants" as they comply with the new bureaucracy.
At the moment, parents qualifying for tax credits can self-certify their childcare costs or details of a teenager in full-time education, projected over the coming year. The majority of overpayments are made in error rather than fraud, often because of miscalculation by parents of childcare costs – particularly if the family switches childcare provider or has another change in circumstances; for instance, in the case of older children, the teenager leaves full-time education but their parents fail to inform HMRC, so the tax credits are still paid out.
Not all parents who claim child tax credits for pre-school children will be targeted but the group of 80,000 asked to provide paperwork are those with high costs or those whose predicted spending does not match actual spending from year to year. HMRC will not give families warning of their checks but send out letters during the year with 10-week accounting periods.
Mr Osborne announced increases in benefits, including tax credits, would be held to 1 per cent, while child benefit is being frozen until 2014, provoking criticism that he is hitting not only those out of a job but working families who claim the money. The Resolution Foundation think tank warned that families with children are being hit particularly hard by the effective cut in benefits, with single parents who claim child tax credit and child benefit losing an average of nearly £330 a year.
James Plunkett, director of policy at the Resolution Foundation, said: "Of course the Government should act against fraud where it exists but there's a real worry of collateral damage for families doing the right thing. Most estimates suggest fraud is extremely rare in the tax credit system. For low-income families just keeping their heads above water, an overly complex system can push people into real financial difficulties."
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