News: Britain's low earners 'mistreated' in new benefits 'nightmare'

'Hundreds of thousands' hit by tax credit fiasco; house prices jump unexpectedly; Mastercard set for new investigation over 'unduly high' fees

Britain's tax credit system, designed to boost the income of poorer families, was last week branded a "nightmare" by an influential group of MPs.

In its second report on the subject, the Public Accounts Committee said the scheme may be fatally undermined by its complexity.

Launched in 2003 for low-income families as part of the Government's reform of the benefit system, there are now six million families receiving child tax credit and working tax credit.

But in its latest report, the committee noted that as a result of administrative and technological errors, some 1.8 million claimants were routinely paid too much money in the 2003-04 tax year.

Worse, many families complained of receiving demands to repay money when they did not know they had been paid too much originally. These demands came with no prior warning, making it difficult for families to plan their finances.

"Hundreds of thousands of genuine claimants, many of them vulnerable people in very difficult circumstances, have been seriously mistreated," said the chairman of the committee, Edward Leigh.

While money was lost through fraud and error under the old scheme, the committee noted, the Inland Revenue (now part of HM Revenue and Customs) had "a lot of work to do" to get the system working fairly and effectively.

Earlier this year, the scheme came under fire from both the Parliamentary Ombudsman and the Citizens Advice Bureau.

Tax specialists are now calling for an immediate review of the regime.

"Modifying the system so it is less reliant on historic data would safeguard people receiving overpayments or underpayments," said Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants.

"This would dramatically improve the overpayment situation, which is causing distress to many families who are being chased to repay monies to the Revenue."

Doomsayers defied

House prices defied expectation by rising at their fastest pace for almost a year last month, according to new figures from the Halifax.

The UK's biggest mortgage lender said prices went up by 1.6 per cent in August - to an average of £165,967. This followed a 0.4 per cent increase in July.

But on an annual basis, it said, prices were 2.5 per cent higher in August. This marked what it described as a "significant downward trend" in underlying house price inflation over the past year - from an annual rate of 21.3 per cent in August 2004.

The Halifax warned that the rise could be a short-lived bounce based on the Bank of England's recent cut in the cost of borrowing - down from 4.75 per cent to 4.5 per cent in August amid concern about slowing UK growth and consumer spending.

A spokesman said the rise was consistent with a continuing pick-up in activity in the market, as prices generally increased when interest rates were first cut. But the trend, he added, was usually a temporary phenomenon.

As was widely pre-dicted, the Bank voted last Thursday to keep rates on hold at 4.5 per cent.

Analysts said last month's sharp jump was not a sign that house prices are about to start surging upwards - but that it should also allay fears of a property market crash.

The Halifax's figures contrasted sharply with those from the Nationwide building society, which earlier this month reported a 0.2 per cent fall in prices during August.

Credit card probe

MasterCard is facing the prospect of a second investigation by the UK's consumer watchdog over the "unduly high" fees levied for using its credit card network.

The news came as the Office of Fair Trading ruled that a previous collective agreement struck between MasterCard and its members (including most of the major banks) was anti-competitive.

The ruling concerned the "interchange fee", which kicks in when shoppers make a purchase and is levied on retailers to cover the cost of handling card transactions. The watchdog branded it a "tax on consumers". This is because shoppers ultimately pick up the cost for the higher interchange fee through higher retail prices.

Between March 2000 and November 2004, said the OFT, the banks were setting the fee too high so that they could recover costs elsewhere - such as those incurred through interest-free periods.

"The parties to this collective agreement set the interchange fee to derive revenues from retailers and their customers over and above the costs of providing the payment services," said OFT chairman Sir John Vickers.

Since last November, MasterCard has changed its fee-charging practices, but the OFT said it still had concerns, and plans to start an investigation into the new arrangements.

While MasterCard said it planned to appeal, the ruling was welcomed by consumer groups. "Interchange fees are a tax on all consumers, whether or not they use credit cards," said Alena Kozokova from the National Consumer Council.

A similar investigation involving Visa card fees is currently under way.