Hounding the poor
The Independent reports that the UK
Government is using debt collection agencies to recover overpaid tax
credits from some of Britain's poorest families. In many cases the
debts are due to errors by HMRC. And in many more cases they are due
to fundamental flaws in the design of the system. Some are due to errors on the part of the claimants. Few, if any, are due to fraud.
The tax credits system is complex. But
the fundamental problem is simple. The design of the system does not
match the reality of people's lives.
The tax credits system is principally designed for people who are in stable long-term employment with a
single employer. But these are the very people who least need tax
credits. This is because, in these days of highly flexible labour
markets, people in stable long-term employment tend to be well paid.
If someone's skills and abilities are scarce enough for an employer
to accept the costs of employing them, the employer is also likely to
pay them well. The poorly-paid tend to be the least secure. Many of
them are part-time: some of the poorest people in the country are
single mothers working part-time. Many are self-employed, because
increasingly employers do not want the costs or responsibilities of
employment for unskilled workers. Many are on temporary or zero-hours
contracts. The picture is not one of a stable workforce of very
low-paid workers helped on a long-term basis by a benevolent government. It is a fluid dynamic of people moving in and out
of short-term and casual jobs, and a tax credits system that can't keep up with the changes and therefore ends up hurting the very people it is supposed to help.
The most unstable income is that of the
self-employed. The picture most people have of self-employment is a
“man with a van”, who earns a very comfortable living doing some
kind of trade. And indeed, that is how self-employment used to be.
But not any more. At the same time as self-employment has vastly
increased, self-employed incomes have crashed in the last five years.
The median income for the self-employed is now less than half median employment income. It is probably fair to say that the majority of
self-employed now depend on tax credits and other benefits. But the
system cannot even begin to cope with them.
Tax credits, like self-employment
taxation, are based on estimated earnings. Your tax credit
entitlement is calculated based upon your income for the previous tax
year. But that may or may not bear any resemblance to your actual
income in the current tax year. HMRC say that they should be told
about changes of income – but they are thinking of someone in
stable employment receiving a pay rise or changing jobs. How is
someone whose self-employed income varies from week to week supposed
to report “changes of income”? HMRC does not have the resources
to staff the phones, or the IT capacity to handle the website
traffic, if self-employed people or people doing short-term temp or
contract work reported to them the income change arising from every
new job or every jobless period.
What happens in practice, therefore, is
that when the self-employed and people with unstable income report their actual income at
the end of the tax year, it differs significantly from the estimate.
This means that they have either been underpaid tax credits, or they
have been overpaid. If they have been underpaid, then they have
struggled on unnecessarily low incomes throughout the year, but they
do receive a year-end top-up payment. But if they have been overpaid,
then the benefits have to be clawed back. This is usually done by
deducting the overpayments from tax credit payments in the following
tax year, which are of course also reduced because the income has
increased. If the income increase is large enough to end eligibility
for tax credits, then the claimant must pay back the overpayment out
of their earnings. In what way is this an incentive to people to work
hard and earn more? And of course, the following year's tax credits
entitlement is estimated.....what if their income from earnings goes
down? Far from relieving stress, benefits themselves are a source of uncertainty and worry for those with unstable income.
The tax credits system simply is not
designed to cope with the constant change that is the reality of many
people's lives. But in part because of its ineffectiveness, it is extremely
complex. Mistakes by administrative staff are common. When these lead
to underpayments, the poor struggle on unnecessarily low incomes, but
they do in the end receive payments. But when these lead to
overpayments, claimants who have previously been told they are
receiving the right amount are suddenly told not only that the amount
was wrong, but that they have to pay it back. And HMRC are not kind
to benefits recipients who are unable to repay overpaid benefits –
I speak from experience. They treat overpaid benefits as debts, even
if the overpayment was due to HMRC's error. And they hound these
“debtors” with unpleasant letters, phone calls, SMS texts. They
pursue them through the courts, and they send in bailiffs to seize
Just to remind you, the people they are chasing for payment are among the poorest in the country. Repaying these overpaid benefits causes real hardship. These people are being made even poorer, and what little creditworthiness they have is being destroyed, by a tax credit system that is not fit for purpose coupled with an overly harsh regime for dealing with involuntary indebtedness.
Leaving aside the questionable morality of pursuing the poor in this manner,
the economics of such a tax credit system make no sense. Tax credits should be
counter-cyclical: as the economy improves and wages rise, so tax
credit payments should fall. But when entitlements are estimated on
the past year's income, overpayments are inevitable in an improving
economy. If you then claw them back by deducting from future claims
and/or earnings, you depress claimants' real incomes. Since benefits
claimants are poor, they are likely
to spend rather than save any income increase. Hitting their
incomes in the name of “keeping benefits bills down” is not
clever if your main economic problem is lack of aggregate demand.
But worse than that, a tax credit
system based upon weak estimates and riddled with unforced errors creates
serious disincentives to work. Consider someone, registered
self-employed, who is doing around 25 hours a week of casual work at
the minimum wage. They are offered the opportunity to do an
additional 15 hours a week for a month. Should they accept this work?
Arguably, no they should not. They will lose nearly all of the extra
income in benefits clawback, most likely accompanied by unpleasant
hounding by debt collection agencies because HMRC won't get round to
noticing the extra income for several months and by that time will
have paid quite a bit too much. Where is the incentive to work hard
and improve earnings, if virtually all of it goes in benefit
clawbacks and there is the added distress of involuntary
If the purpose of the tax credits system – and its replacement Universal Credit – is to provide stability and work incentives to those with low unstable income, it manifestly fails. And if anyone thinks that Universal
Credit will make things better, they are dreaming. The IT
infrastructure for Universal Credit is simply not going to deliver
the flexibility required, and the punitive treatment of people who have been overpaid is set to continue. Indeed it may even get worse, especially for the self-employed.
Originally there was an income buffer, which allowed people's incomes to vary within limits without incurring a benefits penalty. But that was wiped by the Coalition government in the name of cost-cutting. Yet the income buffer removed the disincentives to work that sharp clawbacks create, and it massively reduced the incidence of over- and under-payments. And there is now a new restriction, presumably introduced to reduce abuse of "self-employment" status to get people off the unemployment statistics. Self-employed people on Universal Credit will lose their "income floor" after a year. If their business then suffers a downturn, tax credits will no longer support their income to minimum wage full-time equivalent. The effect will be that self-employed people will be forced to close down businesses experiencing temporary downturns. This is no way to encourage enterprise.
I doubt if removing the income buffer
has saved any money at all. The extra administration needed
to deal with all those overpayments may even have increased the cost.
And harsh treatment of honest people who end up in benefits debt
through no fault of their own is both distressing and
counterproductive. It's a disgrace.
We must do better than this. We need a
benefits system that is simple and cheap to administer, does not
cause involuntary indebtedness and does not penalise hard work and
enterprise. Personally I think a universal basic income would come
closest to meeting this need. But at the very least, we need to
restore the income buffer and ensure that the income floor does not leak for anyone, especially the self-employed. And stop this merciless hounding of the poor.