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Debt Advice Handbook 14th edition

Tax credit overpayments

• The legal position
• Special features
• Court action
• Checklist for action

Child tax credit and working tax credit are means-tested tax credits administered by HM Revenue and Customs (HMRC).

Overpayments of tax credits can arise, for example, if someone does not tell HMRC about a change in her/his circumstances, if s/he gives it incorrect infomation, or if her/his income falls or rises by more than £2,500 in the current year compared with the previous tax year. Some changes in circumstances must be reported immediately and are taken into account. However, changes in income do not have to be reported immediately and can be notified at the end of the tax year when the award is finalised. Clients faced with this choice may need specialist advice.

For further information about tax credits, see Chapter 7 and CPAG’s Welfare Benefits and Tax Credits Handbook.1See also M Willis, ‘Tax Credits’, Quarterly Account 42, IMA

 

1     See also M Willis, ‘Tax Credits’, Quarterly Account 42, IMA »

The legal position

If there is likely to be an overpayment during a tax year, or HMRC realises during the year that an award is too high (sometimes referred to as an ’in-year’ overpayment), it can revise an award and reduce payments for the remainder of the year.1s28(5) TCA 2002

Overpayments that come to light when an award is finalised at the end of the year are sometimes referred to as ’end-of-year’ overpayments.2s28(1) TCA 2002

In the case of joint claims by couples, each partner is ‘jointly and severally’ liable to repay any tax credit overpaid during the year.

HMRC must issue an overpayment notice stating the amount to be repaid and the method of repayment it intends to use.3s29 TCA 2002 Recovery can be:

•by reducing an ongoing tax credits award. There are maximum amounts by which an award can be reduced to recover an end-of-year overpayment.4Reg 12A TC(PC) Regs This is the method HMRC prefers; or
•from the person(s) overpaid, in one lump sum, or by monthly payments over 12 months, or for between three and 10 years so long as the payments are at least £10 a month. Payments of less than £10 a month should only be accepted if the overpayment can be cleared in full within three years; or
•from income support, jobseeker’s allowance (JSA), employment and support allowance (ESA) and pension credit, provided the client consents; or
•from universal credit and new style contribution-based ESA or JSA, without client consent (the debt is transferred to the DWP to recover, but this should not happen if the debt is subject to an outstanding dispute or appeal); or
•through the PAYE system, provided the client does not object; or
•direct from the client’s bank account – in England and Wales the debt must be more than £1000 and you must usually be left with a minimum of £5000 in your account/s; or
•by an attachment of earnings order (see here).

Former partners can agree to repay different amounts, but HMRC has stated that if there is no agreement, partners will only be asked to pay a maximum of 50 per cent each, effectively treating each partner’s share as a separate debt.

Interest can be added to an overpayment if HMRC considers the overpayment occurred as a result of the client’s fraud or neglect.5s37 TCA 2002 The interest is recovered using the same methods as for overpayments.

Note: penalties can be imposed in some circumstances – eg, if someone makes an incorrect statement or supplies incorrect information and this is done fraudulently or negligently. Different procedures apply for the recovery of penalties.

There is right of appeal against a decision to add interest to an overpayment, and against a decision to impose a penalty.

 

1     s28(5) TCA 2002 »

2     s28(1) TCA 2002 »

3     s29 TCA 2002 »

4     Reg 12A TC(PC) Regs »

5     s37 TCA 2002 »

Special features

All overpayments are recoverable, whatever the cause, although HMRC has the discretion not to recover and can decide to write off an overpayment. It has a code of practice on the recovery of tax credit overpayments, What happens if we’ve paid you too much tax credits, available at gov.uk/government/publications/tax-credits-what-happens-if-youve-been-paid-too-much-cop26.

This states that HMRC will not pursue repayment if:

•the overpayment was caused by HMRC failing to meet its ‘responsibilities’; and
•the claimant has met all of her/his ’responsibilities’.

Note: HMRC says that in all cases where an overpayment arose because of a change in a client’s single person/couple status, it will offset the amount the claimant would have been entitled to had s/he claimed correctly. You should provide the HMRC with all the information that would have been needed for a new tax credits claim form following a change in your circumstances.1HMRC, Debt Management and Banking Manual, 555600

HMRC has agreed to stop recovery action of overpayments from 2003 to 2009 either if there has been no contact for 12 months or the client cannot be traced, but it has not formally written off these overpayments.2HMRC annual report 2011/12, para 9.10 However, this policy could change.

It is important to check that the client’s tax credits have been calculated correctly and that s/he has, in fact, been overpaid. A client can appeal to an independent First-tier Tribunal about a matter concerning her/his tax credit entitlement, including whether an overpayment has occurred. S/he must ask for a mandatory reconsideration first before s/he can appeal and must do so within the time limit.

A client cannot appeal to a First-tier Tribunal against a decision to recover an overpayment, but the decision can be disputed with the HMRC. It is best practice to use the official dispute form (TC846). Recovery is not suspended while HMRC decides whether to write off any of the overpayment. If a client has requested a mandatory reconsideration or is appealing an incorrect decision, recovery is suspended pending the outcome of the mandatory reconsideration or appeal.

HMRC can remit (ie, write off) the overpayment if a client:

•has no means to repay an overpayment; or
•has no assets; or
•would experience hardship if recovery were to go ahead.

Specifically, if medical information or evidence is received that the client has a mental health problem, HMRC may agree not to pursue her/him for repayment. HMRC refers to the Money Advice Trust Debt and Mental Health Evidence for guidance.

If an overpayment cannot be recovered from a deceased person’s estate, it can be written off if the surviving partner was jointly and severally liable and recovery from her/him would cause hardship.

An additional means of challenging the recovery of an overpayment is to use the HMRC complaints procedure and/or to complain to the independent Adjudicator’s Office (see Appendix 1). The only legal challenge to a decision to recover an overpayment is by judicial review.

 

1     HMRC, Debt Management and Banking Manual, 555600 »

2     HMRC annual report 2011/12, para 9.10 »

Court Action

If a client refuses to pay or does not keep to any payment arrangement, HMRC considers taking legal proceedings to recover the debt. There is a six-year time limit for taking court action (see here). There is no time limit for recovery by making deductions from ongoing tax credit awards.

Checklist for action

Advisers should take the following action.

•Check liability – are the details of the overpayment correct?
•Challenge incorrect decisions by mandatory reconsideration and appeal.
•Consider whether you can persuade DWP by dispute, complaint or citing hardship or mental health not to recover the overpayment.
•Tax credit overpayments can be a priority or a non-priority debt depending on factors including the date of the award and/or whether the client has been awarded, or migrated to, universal credit. Assist the client to choose a strategy from Chapter 8 if it is a priority debt or Chapter 9 for a non-priority debt.