Designed to lift families out of poverty and give them a helping hand into employment, the Government's tax credit system now shows ample evidence of doing just the opposite - in many cases plunging people into debt so they cannot afford childcare costs and forcing them to give up jobs to look after their children.
Politicians usually shy away from offering apologies, preferring to offer platitudes that things will improve. However, two damning reports from the Citizens Advice Bureau (CAB) and the parliamentary ombudsman prompted prime minister Tony Blair to say he was sorry, after it was revealed that nearly two million of the six million families claiming tax credits had been overpaid and many were now facing acute hardship as the Inland Revenue sought immediate repayment. In addition to the 2bn in overpayments to be clawed back from 1.9 million people, a further 713,000 people had been underpaid by 500m. A further 800m overpaid in 2003/04 will not be pursued by the Inland Revenue.
The CAB report, Money with your name on it?, which looked at 150,000 cases handled by its offices around the country, says that some parents had been forced to withdraw children from childcare because they could not pay providers. This has given ammunition to those in the sector who believe that childcare subsidies should go direct to providers.
The CAB concludes that the childcare element of the tax credit 'should always be paid in full, in order to enable families to remain in employment'.
It adds, 'When reducing payments to recover overpayments, the childcare element should be removed from the calculation to ensure the claimant can pay their childcare costs and their employment is not put at risk.'
Sharon Murphy, who runs the First4Kids neighbourhood nursery in Skelmersdale, a disadvantaged area in Lancashire, says, 'There are an awful lot of parents here who have had to cut the time their children spend in the nursery or withdraw them altogether. They were using it full-time so they could work. They were then told they had been overpaid and now the tax credit people are taking it off them and they are struggling.'
The CAB gives some measure of the gravity of the tax credit crisis when it reveals that it had to organise emergency food parcels for destitute families. 'Tax credits offer substantial extra cash to low-income families, but poor administration and system failure have plunged many below the breadline and into mounting debt,' the CAB report states.
The ombudsman, Ann Abraham, says, 'Many families report having to borrow money from family and friends to support their children, using up all their life savings or running up credit card debts in order to pay for childcare, buy food and get to work.'
The Public and Commercial Services union (PCS) warned two years ago that 'the pressures put on staff and customers through computer failure, poor planning and allocation of resources seriously undermined what is a flagship Government programme. The lessons need to be learned if public trust and faith in the taxation and benefits system is to be retained'.
That was in 2003, and now the PCS warns that with Government plans to axe 10,000 jobs in what is now called HM Revenue and Customs, the situation will only worsen. A PCS spokesman says, 'There have been a catalogue of problems with the computer system. It is a very complex system of calculating people's entitle- ment, and when we need more staff the Government is saying we will have less. The end result will be further misery for claimants.'
There is mounting evidence that the tax credit debacle is also having a serious knock-on effect on nurseries, particularly those in disadvantaged areas where many parents are heavily dependent on subsidies.
Debbie Wylie, who operates Little Angels nursery in Cramlington, North- umberland, says, 'It impacts on people quite significantly when they are being asked to pay back large amounts of money. It would alleviate a great deal of the stress if people felt they weren't dealing with someone so remote but could get in touch with a call centre or even a counsellor to help them.'
She says a member of her staff had a sudden demand for repayment and felt vulnerable and upset, being on her own with young children. 'People feel they are being asked to monitor what they are receiving from the Inland Revenue as well as making sure they are not submitting incorrect information.'
At the recent annual conference of the National Day Nurseries Association (NDNA), she says, most of the delegates appeared to feel that childcare vouchers would help prevent fraud and lessen the impact of failings within the tax credit system. That would have prevented parents of children from her nursery misspending a total of 8,000 in tax credits earmarked for childcare costs.
But Ms Wylie adds, 'Even if the childcare element comes in the form of vouchers, you are not going to eradicate the problem of inaccuracy, because the same calculation has to be carried out.'
Possible adjustments
John Woodward, director of the Busy Bees nursery chain, which operates a large voucher business, acknowledges that vouchers will not solve the problem of miscalculation. But he says, 'Our view is that we have always looked at vouchers as a way of making sure that providers get the money.'
He suggests that providers could be paid the childcare element of the tax credit, with a review of parents' entitlement every 12 months. He argues that overpayments under a certain percentage could be ignored, while adjustments for larger overpayments or underpayments could be made in the following year.
He emphasises that the furore over tax credits should not obscure the fact that this type of support for childcare is right, and that it is the current administration of it which is wrong.
Purnima Tanuku, chief executive of the NDNA, agrees that tax credits have provided 'valuable support for families', but says 'the existing schemes have created an administration burden for day nurseries'.
She cites three reasons for lobbying the Government to consider a move to direct funding to the childcare provider: to help parents claim what they are entitled to with a minimum of complication; to ease the time-consuming Inland Revenue tax credit audits that nursery managers need to comply with; and to close loopholes that allow fraudulent claims.
Steve Alexander, chief executive of the Pre-School Learning Alliance, says that transferring the childcare element direct to providers would help to 'ensure stability in the childcare sector'. He would like to see this coupled with 'a transparent and visible tax credit system which was easy to claim and easy to administrate'.
Sharon Murphy says that nursery owners are placed in an awkward position because, while they are naturally sympathetic to parents facing draconian repayment demands, they are also mindful that some parents may be using this as an excuse to delay or even avoid paying the nursery.
Personal finances
Debbie Wylie says parents at her nursery are given help in filling in tax credit forms if they ask for assistance. But she believes that the 8,000 owed to her nursery is not due to overt fraud; it can be put down to an inability on the part of some parents to manage their finances properly.
'The childcare element of the tax credit can be quite a large sum, which they may not have had before and it is very tempting,' she says.
'These people will not have had the chance to learn about how to manage their personal finances when they were at school, and that can be a huge problem.'
Sharon Murphy agrees that the problem is particularly acute in an area of deprivation, where some parents have never seen such large amounts of money before.
The ombudsman recommends that overpayments resulting from 'official error'
in the first two years of the new system should be written off, not least because the cost of dealing with disputed overpayments could be Pounds 8.5m.
'This would be a sensible and proportionate response to the situation and would give much-needed relief to people who have been caused considerable distress and hardship,' she says.
The CAB says there 'should be no automatic recovery of overpayments without a review - people should be notified and given a chance to challenge the decision and agree an approach to repayment'.
While parents, nursery staff - many of them low-paid and entitled to tax credit support - and nurseries are penalised by the current harsh recovery procedures, in the short term the Government will remain under pressure to relax repayment demands. In the longer term, childcare organisations will be stepping up their campaign for a more substantial overhaul of the system and the introduction of payments direct to providers.
Useful contacts
* Tax credit helpline: 0845 300 3900
* Consumer credit counselling service: 0800 1381111
* National debtline: 0808 8084000
* Citizen's Advice: 020 7833 2181
