HMRC should help the poor

Not all the £5.6bn can or will be recovered, but we are talking about a huge sum the HMRC is seek to extract

The complexity of the tax credit system has imposed a heavier burden of debt on some of the working poor than previously thought. As we report exclusively today, overpayments of tax credits mean that nearly 5 million families now owe the Exchequer £5.6bn.

This is a lot of money. It is so much that it would pay the salary of an extra teacher in every school in the country for five years. That statistic gives some idea, not just of the scale of the problem, but of the moral dilemma involved in trying to solve it.

The money that HM Revenue and Customs is trying to recover could be put to good use - not least because the Government is still spending so much more than its income. Yet it is trying to recover the money from people who are already among the hardest-pressed.

The existence of a backlog of debt this size is a criticism of the complexity and inefficiency of Gordon Brown's policy for increasing the incentive to move from benefits into work. The aim of the tax credit scheme was a good one, and it may have helped create the conditions for today's jobs-generating recovery. But the scheme has been dogged by poor administration from the start, mainly because it relies on taxpayers telling HMRC about changes in their circumstances. Tony Blair claims that Mr Brown, as Chancellor, kept him in the dark about the costs of the scheme. Even so, while Mr Blair was Prime Minister the tax authorities seemed to be getting a grip, bringing the number of cases of overpayment down to 1.2m. Since then, though, the number of cases and the total outstanding have increased every year.

The temptation might be to say that it is too difficult to recover the money, and that it is unfair to try to do so from families who are, or have been, only just above the poorest. Indeed, the Government has not helped its case by subcontracting debt collection to private agencies. However, an amnesty would be unfair to those people who have diligently informed HMRC of changes in their circumstances, thus cutting their tax credits.

Actually, the Government's approach is probably about right. It has cut back the generosity of the tax credit system overall, and has tried to simplify it - paradoxically a complex task, with much of the energy of attempted reform being wasted on the failure of Universal Credit. It focuses its recovery attempts on the minority of cases owing more than £1,000 - and claims to take a sympathetic attitude to the avoiding of hardship.

However, Gillian Guy, chief executive of Citizens Advice, is right to warn: "The safeguards put in place look sensible on paper but with such huge pressure on household budgets, it does not take much to push families into financial trouble and mistakes by HMRC will be harmful."

And there is more that could be done to secure public support for the tax credit system and the debt-chasing that seems to be an intrinsic feature of it. Our suggestion is that any tax-credit overpayments that are recovered should go into a fund earmarked for cases of hardship, including those affected by the bedroom tax, which often affects the same people, and especially for those working on low incomes.

Obviously, not all of the £5.6bn can or will be recovered, but we are talking about a huge sum that HMRC is seeking to extract from the pockets or bank accounts of some of the poorest people in the country, many of whom owe tax-credit repayments through no fault of their own. Social justice requires that the money recovered should be used only in ways that benefit those on low incomes.