3 February 2010 Millbank Tower, Millbank, London SW1P 4QP

Report on an investigation into complaint no against Thurrock Council 3 February 2010 Millbank Tower, Millbank, London SW1P 4QP

Investigation into complaint no against Thurrock Council Table of Contents Page Report summary 1 Introduction 3 Legal and administrative background 3 My jurisdiction 3 Relevant council tax legislation 3 Bailiffs 4 Bankruptcy 4 Investigation 5 Background 5 Council s initial view 7 Council s current view 8 What the Council has done 8 Conclusion 9 Findings 10 Recommendations 10 Key to names used Mr North the complainant Officer A senior Council manager

Report summary Council tax recovery action The Council took the first step towards making Mr North (not his real name for legal reasons) bankrupt for council tax arrears, by serving a statutory demand in November 2008. As an alternative to being made bankrupt Mr North was then given the opportunity to make an agreement with the Council to pay the arrears in instalments. Mr North was told he would have to pay a 400 fee to cover the administration costs of the instalment arrangement. The fee had been introduced as part of a range of measures introduced by the Council to improve the collection of council tax; the collection of council tax was contracted out to a private company called Vertex which was also responsible for recovery action. Mr North agreed to pay by instalments but challenged the amount of the fee and whether the Council had the authority to make a charge. Over a number of months the Council maintained that it was appropriate to make a charge for the cost of administrating the payment plan. And, eight months after Mr North requested a breakdown of the fee, the Council provided an explanation of how the 400 had been accrued. Mr North did not accept that the Council was entitled to charge the 400 and he thought the amount of the charge was excessive and did not reflect the actual costs that had been incurred. Finding The Ombudsman found that the Council was at fault for charging the fee. He found that the fee had been introduced without the policy being considered by Council officers or by the Council s legal department. The Council had charged 178 people a 400 fee which was illegal and could not be enforced. Soon after the Ombudsman started to investigate the complaint the Council accepted that there was no basis on which it could make the charge. It immediately stopped charging the fee and took steps to reimburse everyone who had paid it. The Council also decided to offer a goodwill payment to everyone who had paid the fee. The Ombudsman also found that the Council had taken too long to deal with Mr North s request for a breakdown and it had missed out on an opportunity to assess the legality of the fee when Mr North first queried it. There had also been a failure by the Council to ensure that policies are properly scrutinised and monitored, and a failure to monitor the actions being taken by Vertex. 1

Recommended remedy The Ombudsman recommended that the Council pay Mr North the 40 goodwill payment being given to everyone who had paid the fee, plus an additional 60 to reflect his time and trouble in dealing with the complaint. He recommended that the Council introduce a procedure to ensure that all policies that are introduced are properly scrutinised and implemented. He also asked the Council to review the way that the Vertex deals with complaints. 2

Introduction 1. Mr North complains that the 400 fee the Council charged when he agreed to pay his council tax arrears in instalments, as an alternative to bankruptcy proceedings, was illegal and excessive. He also complains that the Council took too long to provide him with an explanation as to why the fee was being charged and to provide a breakdown as to how the amount of the fee had been calculated. 2. For legal reasons, the names in this report are not the real names of the people involved 1. Legal and administrative background My jurisdiction 3. My authority to investigate complaints stems from the 1974 Local Government Act. 4. The Act says that I cannot conduct an investigation into the commencement or conduct of civil or criminal proceedings in any court of law 2. 5. However, I am able to consider actions which occurred before the start of legal proceedings. 6. The 1974 Act also says that I should only investigate a complaint if the matter has already been brought to the attention of the authority and the authority has had an opportunity to consider the complaint and respond 3. 7. My authority to investigate complaints also extends to companies or organisations who act on behalf of an authority. Relevant council tax legislation 8. The Council Tax (Administration and Enforcement) Regulations 1992 [SI 613/1992] set out the powers which govern the collection of council tax. 9. Council tax is payable by most people who occupy their own home. If council tax is unpaid then the Council can apply for a liability order from the Magistrates Court. Once a liability order has been obtained there are a number of ways in which the Council can try to secure payment of the arrears. Options for the 1 Local Government Act 1974, Section 30(3) 2 Local Government Act 1974, Schedule 5 3 Local Government Act 1974 Section 26(5)a 3

Bailiffs recovery of a council tax debt include action by bailiffs and bankruptcy proceedings. 10. Bailiffs can be instructed to collect council tax arrears. This is usually done by the bailiffs threatening to take, or taking, certain goods belonging to the debtor. Bankruptcy 11. Bankruptcy can be used as a means to try and recover a debt where a creditor is owed at least 750. A council can use bankruptcy as a means to recover council tax arrears. 12. The process starts when the creditor serves a statutory demand for the debt. There is a standard format for the demand which gives details of the debts owed, the amount that is owed and the court orders relating to the debt. The demand can only include debts that have accrued at the time the demand was served (i.e. the amount that is owed is limited to the amount specified on the statutory demand). In the case of council tax, the amount stated on the demand can include the amount specified by the liability order and any costs incurred up to the service of the demand associated with recovery action. The statutory demand is issued by the creditor, not the court. 13. The costs of the statutory demand do not become payable unless or until a bankruptcy order is made. If an arrangement is made, and the instalment payments maintained, then the matter will not proceed to bankruptcy; the amount payable at this stage, whether as a lump sum or by instalments, is only the amount stated on the statutory demand. 14. If the statutory demand is served and the debt remains unpaid after a further 21 days (or no arrangement has been made to the satisfaction of the creditor), then a bankruptcy petition can be served. A debtor can oppose the making of a bankruptcy order on the grounds that the debt is not owed, and the court can stay proceedings if it appears that the debt may be settled in a short period of time. However, an adjournment is only likely to be agreed if the offer to settle the debt is one that no reasonable creditor would refuse. 15. If a bankruptcy order is made then the Official Receiver considers the circumstances of the debtor and whether the debtor has assets which might be used to pay the debts. 16. The Government does not issue any guidance to councils on using bankruptcy proceedings to collect council tax arrears. In a written response to a parliamentary question in July 2007, the Government said that it was up to each billing authority to consider how best to use these powers in the interests of all taxpayers who do pay their bills and it had no plans to issue such guidance. 4

Investigation Background 17. Collection of council tax at Thurrock Council has been contracted out to a private company called Vertex; the day to day running of the department is conducted by Vertex but ultimate responsibility remains with the Council. Vertex also deals with complaints under a three stage process; references in this report to the Council includes actions taken by Vertex. 18. Mr North has a long history of council tax arrears; recovery action, including the use of bailiffs, has been periodically taken since 2004. This included a statutory demand which was served in May 2008 for arrears for the financial year 2007/08; the amount was subsequently paid in full. 19. On 28 July 2008 the Council drew up a statutory demand for council tax arrears of 1316.57 for the period 1 April 2008 to 31 March 2009; a liability order had been obtained on 4 July 2008. Mr North was served with the statutory demand on 10 November 2008. The Council had tried to serve the demand before 10 November but had been unable to make contact with Mr North. 20. Having received the statutory demand Mr North contacted the Council and established that he had the following options: Within 18 days apply to have the demand set aside; Pay the amount in full within 21 days; Within 21 days negotiate a payment plan with the Council to pay the debt by instalments. Take no action and wait for the Council to take bankruptcy proceedings. 21. Mr North decided to make an agreement to pay by instalments of 250 per month. However, he was then told that he would be charged a 400 administration fee because he was paying by instalments. Mr North told the Council that he would pay by instalments but he made it clear that he disputed the 400 fee; he asked for information about how the fee had been calculated. 22. The Council wrote to Mr North on 26 November 2008 to confirm the arrangement; the letter stated the outstanding amount was 1716.57 ( 1316.57 as stated on the statutory demand plus the 400 fee) and that he was required to pay 250 on the 28 th day of each month. The letter warned Mr North that if he did not keep to the arrangement then the Council would take further bankruptcy proceedings. 5

23. In the meantime Mr North continued to object to the 400 fee and he was seeking an explanation as to how the amount had been calculated. In his view the 400 fee was excessive and did not reflect the administrative costs that may actually have been incurred. 24. Mr North was late in making payments in January and February 2009; however, on 11 February 2009 he told the Council he had changed the standing order so payment was made on the 10 th day of each month. 25. In February Mr North was sent a letter stating bailiffs might be instructed for outstanding amounts of council tax of 30 and 120. However, this related to council tax that he had already paid. On 26 February Mr North sent an email to complain about this and to again seek an explanation about the 400 fee. Mr North also made a decision not to make any more payments towards his arrears because he was unhappy with how his arrears were being managed by the Council. 26. As part of the complaints procedure the Council issued a stage one response on 25 March; it apologised for demanding the 30 and 120 and said these amounts had been requested in error. It also stated that the 400 was a one off fee payable in respect of the on-going administration of the debt. The letter went on to say, such action has to be paid for and it would be unfair to expect those who pay their council tax on time to carry this burden. At this stage Mr North still had outstanding arrears of 715.57 (including the fee); he was asked to pay 250 in April, May and June. However, Mr North did not make any further payments. 27. Mr North wrote to the Council on 6 May; he again disputed the 400 fee, asked for a breakdown of how it was calculated and asked for the fee to be removed. Mr North pointed out that the fee did not form part of the statutory demand or the liability orders that had been obtained. 28. The Council sent a stage two response on 15 June; it said that the removal of the 400 could not be justified. The letter explained that the 400 fee covers the cost of the recovery action taken on your account and the administration costs of monitoring arrangements to pay. The letter also said that by agreeing to pay by instalments Mr North had accepted the fee; if Mr North had disputed the fee then an arrangement would not have been made and the Council would have proceeded with bankruptcy. If Mr North had been made bankrupt then he would have incurred costs of 1250. The letter also explained that because Mr North had not maintained the payments of 250 the account had been passed to the bailiffs. He was warned that the referral to the bailiffs was likely to result in additional costs. 29. Bailiffs subsequently visited on 27 May and 24 June 2009. Mr North did not make any payments to the bailiffs; he incurred fees of 42.50. 6

30. Mr North wrote a further letter on 23 June. He again asked for a breakdown of the 400 fee and stated that he had not accepted the fee when he agreed to pay by instalments. He pointed out then when he made the agreement in November 2008 he clearly said that whilst agreeing to pay by instalments he was disputing the 400 charge. Mr North also disputed the referral of his account to the bailiffs when he was pursuing a complaint about the fee. 31. The Council sent its stage three reply on 6 July. It explained that the fee had been calculated in the following way: Service of bankruptcy statutory demand = 40 Officer time for manually checking individual cases on a regular monthly/weekly basis (2 hours per case per month for an average of 8 months) = 320 Issuing of correspondence (confirmation letter etc) = 40 Total = 400 32. The Council apologised for not providing the breakdown earlier. It also stated again that it believed Mr North had accepted the fee by agreeing to pay by instalments and then by making some payments. The letter also stated that the 400 fee is an actual figure to cover real costs in administering your debt. 33. Mr North remained unhappy about the 400 fee so he made a complaint to me. Council s initial view 34. In its initial response to my enquiries, the Council said that there was no specific legislation regarding arrangement fees but we consider the fee a reasonable reflection of the administration costs involved in dealing with such matters. Much higher costs would be incurred if the bankruptcy action proceeded. 35. However, when one of my investigators conducted an interview with Officer A, it became apparent that the Council had reconsidered its view about the fee in the light of legal opinion. 36. Officer A explained the following: Vertex had been asked to improve the collection rates of council tax. One of the ways it did this was to initiate bankruptcy proceedings but then offer payment by instalments as an alternative to issuing the bankruptcy petition. The 400 fee was introduced as part of this process to cover additional administration costs. The fee had not been approved by Council officers, members or by the legal department. But Officer A stressed the fee had arisen out of good intentions to provide an alternative to bankruptcy. He thought the fee had been introduced in late 2008. 7

Officer A explained that the 400 was a blanket fee charged to everyone who agreed to pay by instalments. He said there was a fee calculation document relating to the fee but, in his words, it was not fit for purpose. The officer also said that if Mr North had not paid the fee it would have remained on his council tax account as a debt. But, the officer agreed there would not have been any way that the Council could force payment of the fee. Council s current view 37. The Council obtained independent legal advice about the 400 fee which said: I am not aware of any other basis on which it could be argued that the Council has power to levy or agree the 400 charge, or any part of it. Specifically, the Insolvency Rules do not provide that the costs of a statutory demand are recoverable from the debtor unless or until the bankruptcy order is made. For these reasons, and while I appreciate why the Council would wish to recover from the debtor the costs perceived to be associated with the payment plan, I am of the clear opinion that the Council has no power to levy or seek to charge the 400 sum in respect of such arrangements. 38. The Council now accepts that there is no legal basis on which it can make this charge; it agrees that the charge is unlawful. 39. It also agrees that it needs to improve its procedures to ensure that new policies are reviewed and approved by officers, and, where appropriate, by members or the legal department. What the Council has done 40. The Council has stopped charging any fee when payment is made by instalments as an alternative to bankruptcy. 41. The Council has agreed to reimburse, or offset against arrears, everybody who has paid the 400 fee in full or in part. The Council is also planning to make a goodwill payment of 40 to everyone who has paid the fee, in full or in part. 42. The Council explained that 178 people had been charged the fee and it provided the following information about how many people had paid the fee and the action the Council planned to take (the following figures were correct as of 25 January 2010). 8

Category Number of People Resolution Not paid the fee 128 Fee withdrawn Paid some of the fee 24 Fee withdrawn Amount paid offset against council tax arrears or refunded 40 goodwill payment Paid fee in full 26 Fee withdrawn Full refund and 40 good will payment 43. The Council accepts that it needs to improve the way policies are introduced and implemented, and that it needs to develop more stringent processes for implementing policies with its partners. 44. The bailiff fees of 42.50 which were incurred by Mr North in May and June have been waived. Mr North has been offered the opportunity to pay the remaining arrears of 315 in instalments. Conclusion 45. Mr North has a long history of council tax arrears and, having obtained a liability order, the Council was entitled to use bankruptcy proceedings as a means of recovering the debt. The Council was also entitled to agree to accept a payment plan as an alternative to bankruptcy. And, it is correct that if Mr North had been made bankrupt he would have incurred fees of 1250. And, there was no reason why the Council could not instruct bailiffs when Mr North did not keep to the payment arrangement. 46. Mr North was required to pay his council tax and when he chose not to continue with his payment arrangement it was inevitable that further recovery action would follow. He could have continued to make payments of 250 per month up to the amount stated on the statutory demand, but not pay the 400 that he was disputing. 47. In my view the Council was at fault in charging the 400 fee. There is no legislation which allows for the fee to be charged and independent legal advice has confirmed this. The fee was introduced without reference to officers, members or the Council s legal department and there appears to have been no scrutiny to ensure that the policy was legal. 9

48. The Council has confirmed that 178 people were charged the fee. It is impossible to say how many people would have gone on to pay the fee in full but potentially the fee could have generated a total payment to the Council of 71,200. 49. I also find that the Council was at fault for failing to respond promptly to Mr North s request for a fee breakdown; he asked for this information in November 2008 but he did not receive it until July 2009. Mr North had suggested that the policy was unlawful and I think the Council missed an opportunity to examine the policy to assess its legality. I am also disappointed that when my investigator first made enquiries, the Council admitted that the fee was not supported by any legislation but it could see no reason why it could not continue to be charged. 50. However, following that initial response, I welcome the action now taken by the Council. I am pleased to see that the fee is no longer being charged and there is no intention to reinstate it. I was also pleased to learn that everyone who has paid the fee will be reimbursed, or have the sum offset against arrears, and will be offered a 40 goodwill payment. And, I think it was appropriate that the bailiff fees have been waived and Mr North offered another chance to pay his arrears by instalments. 51. I am, however, concerned that there may be other councils who are charging the fee and I have written this report because I think it raises issues which are of a wider public interest. Findings 52. For the reasons explained in paragraphs 47 to 49 I find that there has been maladministration which caused an injustice to Mr North. Recommendations 53. I recommend that the Council pay Mr North the 40 goodwill payment that is being offered to everyone who has paid the fee. And, I recommend that he is paid an additional 60 to reflect the time and trouble he has been put to in pursuing this complaint. 54. I also recommend that the Council implement a procedure to ensure that policies introduced by Vertex are properly scrutinised and implemented. 55. And I recommend that the Council review the way that Vertex handle complaints to ensure that enquiries are dealt with promptly and that issues that are raised are correctly assessed. 56. The Council should provide proof of the procedural improvements within the three months of the report being issued. 10

Tony Redmond 3 February 2010 Local Government Ombudsman 10 th Floor Millbank Tower Millbank London SW1P 4QP 11