Debt Advice Handbook 14th editionChapter 4: Types of debt 5. Tax, business and benefit debts
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5. Tax, business and benefit debts
Business debts
Many people seek advice about business debts (see Chapter 16). If a business is still trading but is facing financial difficulties, seek specialist advice from, for instance, an accountant, insolvency practitioner, local business centre or small firms advisory service on the viability of the business.
The legal position
If the business has already ceased trading, deal with debts as with any other case of multiple debt, using the same criteria to decide whether they should be treated as a priority or not (see Chapter 8).
First, establish liability for the debts. You should check whether the client was a sole trader, in a partnership or a limited company. A sole trader is personally liable for all the debts; in a partnership, all partners are ‘jointly and severally’ liable. In limited companies, only the directors can be held liable for any debts, and then only if they have personally guaranteed a loan or, under company law, if there has been wrongful trading or neglect of their duties as directors.
Checklist for action
Advisers should take the following action.
    •Consider whether emergency action is necessary (see Chapter 8).
    •As some business debts are qualifying debts, check to see if an application for breathing space would be an appropriate course of action (see here).
    •Consider whether the client should be referred to a specialist agency – eg, Business Debtline (see Appendix 1).
    •Otherwise, assist the client to choose a strategy from Chapter 8 for any priority debts and/or from Chapter 9 for any non-priority debts.
Council tax
This is a tax administered by local authorities, comprising two equal elements – a ’property’ element and a ’people’ element.
For more detailed information, see CPAG’s Council Tax Handbook.1Council tax also applies in Scotland. For the position where a Scottish local authority is pursuing a client who lives in England or Wales for unpaid Scottish council tax, see ‘Q & A with Shelter Specialist Debt Advice Service’, Quarterly Account 52, p24.
 
1     Council tax also applies in Scotland. For the position where a Scottish local authority is pursuing a client who lives in England or Wales for unpaid Scottish council tax, see ‘Q & A with Shelter Specialist Debt Advice Service’, Quarterly Account 52, p24. »
Property element
All domestic properties have been valued and placed in one of eight valuation bands in England and nine in Wales.
In England, the valuation is based on what the property would have sold for on the open market in April 1991. In Wales, properties were revalued on 1 April 2003 and the new valuations took effect from 1 April 2005. It is assumed that the property was sold freehold (or with a 99-year lease for flats), with vacant possession and in a reasonable state of repair. Under some circumstances, an appeal against this valuation can be made. Certain properties are exempt, and advisers should check to make sure that exemption has been applied for, if appropriate.
People element
The tax assumes that two adults aged 18 or over live in each household. Nothing extra is payable if there are more than two adults. One adult living on her/his own receives a 25 per cent discount. If there are no adults, there is a 50 per cent discount. If the latter applies, it may be that the property is exempt, and you should check whether this is the case.
When counting the number of adults in the household, certain people can be disregarded and this should be checked. In addition, in certain cases, there are reductions for people with disabilities whose homes have been modified or if a disabled resident uses a wheelchair in the home. Note: the disabled person does not have to be the person liable for the council tax.1For further details, see Chapter 6 of CPAG’s Council Tax Handbook
 
1     For further details, see Chapter 6 of CPAG’s Council Tax Handbook »
Liability
A council tax bill is sent to each domestic property. There is a ’hierarchy’ of liability, as follows:
    •resident freeholder (owner);
    •resident leaseholder;
    •resident statutory/secure tenant (including a council tenant);
    •other resident(s);
    •non-resident owner (depending on the terms of her/his tenancy, a former tenant who no longer occupies the property could come into this category1Leeds CC v Broadley (Adviser 181 abstracts). See also R Curry, ‘Liabilities on Leaving a Tenancy’, Quarterly Account 49, IMA.).
If there is more than one resident who has the same interest in the property (ie, joint owners or joint tenants), they are ‘jointly and severally’ liable. This means that all the people concerned can be asked to pay the full charge, together or as individuals. Married couples and couples who live together are jointly liable. A single bill is sent, either in the name of one of the persons concerned, or in both names.
Students and people who are ’severely mentally impaired’ are disregarded and may be exempt. They cannot be jointly and severally liable if there is someone else with the same status and legal interest in the property who is not exempt. Dwellings in which all the occupants are students and/or severely mentally impaired are exempt.
If a client is (or has been) admitted to a hospital and detained under a Mental Health Act 1983 section order, they are also automatically exempted from council tax liability. Unlike ‘severe mental impairment’, the client does not need to be entitled to prescribed benefits. Most local authorities will accept written evidence from a hospital that a section order is in place. However, the exemption is limited to the term of the section order. Once the client has been discharged from the section order, they automatically become ‘visible’ once more – ie, no longer disregarded. 2For a discussion of when a resident who is disregarded can be liable for council tax, see Shelter Specialist Debt Advice Service, ‘Q & A’, Quarterly Account 52, IMA
Bills should be issued less any discounts, deductions and council tax reduction (also known as council tax support), and must arrive at least 14 days before the first instalment falls due. The local authority usually asks for payment by 10 monthly instalments but must offer the option of paying by 12 monthly instalments if requested to do so. Any discount(s) can be backdated indefinitely.
There is a right to appeal to a valuation tribunal against certain decisions, including those on liability, valuations, discounts, exemptions and council tax reduction.3See A Murdie, ‘When the Ombudsman is not Enough’, Adviser 158; SC v East Riding of Yorkshire (Adviser 164 money advice abstracts)
Under section 13A LGFA 1992, local authorities have the power to reduce or remit sums of council tax, including arrears, in cases of hardship (see here).4s13A LGFA 1992
 
1     Leeds CC v Broadley (Adviser 181 abstracts). See also R Curry, ‘Liabilities on Leaving a Tenancy’, Quarterly Account 49, IMA. »
2     For a discussion of when a resident who is disregarded can be liable for council tax, see Shelter Specialist Debt Advice Service, ‘Q & A’, Quarterly Account 52, IMA »
3     See A Murdie, ‘When the Ombudsman is not Enough’, Adviser 158; SC v East Riding of Yorkshire (Adviser 164 money advice abstracts) »
4     s13A LGFA 1992 »
Checklist for action
Advisers should take the following action.
    •Consider whether emergency action is necessary (see Chapter 8).
    •Check whether the property is exempt and the client is in receipt of all relevant discounts and reductions, including council tax reduction.
    •Check liability for the debt, including any associated enforcement agent’s (bailiff’s) charges. Consider whether there are any grounds for a complaint.
    •Check to see if an application for breathing space would be an appropriate course of action (see here).
    •Consider an application for a debt relief order (DRO). Council tax arrears are a qualifying debt for a DRO (here).
    •Assist the client to choose a strategy from Chapter 8, because this is a priority debt.
Income tax arrears
HM Revenue & Customs has issued a briefing setting out its current approach to collecting tax debts that is available at gov.uk/government/publications/hmrc-issue-briefing-collecting-tax-debts-as-we-emerge-from-coronavirus-covid-19. HMRC says that clients should respond to communications as soon as possible to discuss the situation as otherwise HMRC will not know if they need support or are refusing to pay. HMRC says it wants to work with clients to find a way for them to pay off their tax debts as quickly as possible but in an affordable way, such as a Time to Pay arrangement (an instalment payment plan). In appropriate cases, HMRC says that it may be able to offer a short-term payment deferral for a set period of time during which HMRC would undertake no collection activity. Where clients are unwilling to discuss a payment plan or are failing to repond to communications, HMRC says that it will consider using its enforcement powers to collect outstanding tax debts.
Most income above certain fixed limits is taxable. Employees are taxed by direct deduction from their income by their employer (the pay as you earn (PAYE) scheme). PAYE taxpayers rarely owe tax on their earned income unless mistakes have been made in the amounts deducted. Self-employed people receive their earnings before tax is deducted and are responsible for paying their own tax directly to HMRC. Arrears are, therefore, more likely to occur with self-employment. See Chapter 16 for more information.
The legal position
Income tax is payable under the Taxes Management Act 1970 and the Income and Corporation Taxes Act 1988 and subsequent Finance Acts and regulations.
HMRC can take control of goods for unpaid income tax without a court order and is not subject to any limitation period for taking court action to recover the unpaid income tax and any interest, but penalties are subject to a six-year limitation period (see here). The client could even be imprisoned for non-payment. Tax debts of up to £3,000 owed by previously self-employed clients can be recovered through the PAYE system.
Special features
There are many ways of reducing liability for tax, unless it is deducted under PAYE. Self-employed people, in particular, require detailed advice on how to complete their tax returns and on any arrears that HMRC may be claiming. Self-employed people should obtain specialist help either from an accountant, Business Debtline or TaxAid if they wish to challenge the amount of any arrears claimed (see Appendix 1).
It may be possible to negotiate remission (write-off) of a tax debt if the client’s circumstances are unlikely to improve – eg, if s/he is permanently unable to work because of ill health or if s/he has no hope of increasing her/his income because of her/his age.
If the business is continuing to trade, however, it is vital that the client pays any ongoing tax on time and makes arrangements to repay any tax debt, otherwise HMRC can take control of essential goods without a court order and so close down the business.
Checklist for action
Advisers should take the following action.
    •Consider whether emergency action is necessary (see Chapter 8).
    •Check if an application for breathing space would be an appropriate course of action (see here).
    •Consider an application for a DRO. Income tax arrears are a qualifing debt in a DRO (see here).
    •Consider whether the client should be referred to a specialist agency – eg, TaxAid.
    •Otherwise, assist the client to choose a strategy from Chapter 8 because this is usually treated as a priority debt.
National insurance contributions
National insurance (NI) contributions are a compulsory tax on earnings and profits above certain levels (set annually).
The legal position
NI contributions are payable under section 2 of the Social Security Act 1975, as amended by the Social Security Contributions and Benefits Act 1992.
Special features
Employed people pay class 1 NI contributions directly from their wages and so do not build up arrears. Class 2 contributions must be paid by self-employed earners unless they have a certificate of exemption on the grounds of low income. In addition, self-employed people may have to pay class 4 contributions, calculated as a percentage of their profits above a certain level (set annually). After the year end, HMRC sends out demands to self-employed people from whom it has not received the required class 2 contributions.
If a self-employed person has also employed someone else, s/he may be liable for class 1 NI contributions for the employee, as well as class 2, and perhaps 4, contributions for her/himself.
Demands for payment should be distinguished from the notice sent to people whose contribution record is insufficient to entitle them to use it towards a retirement pension or bereavement benefits (known as a ‘deficiency notice’). In such cases, HMRC sends a notification giving the opportunity to make up the deficit for a particular year with voluntary (class 3) contributions. This is not a demand for payment.
It is vital that the client pays any ongoing contributions on time and makes arrangements to repay any arrears, otherwise HMRC can take control of essential goods without a court order and so close down a business. In addition, if contributions remain unpaid, the client’s eventual entitlement to contributory benefits, including retirement pension, will be affected.
Checklist for action
Advisers should take the following action.
    •Consider whether emergency action is necessary (see Chapter 8).
    •Check to see if an application for breathing space would be an appropriate course of action (see here).
    •Consider an application for a DRO. NI number arrears are a qualifying debt in a DRO (see here).
    •Consider whether the client should be referred to a specialist agency – eg, TaxAid.
    •Otherwise, assist the client to choose a strategy from Chapter 8 as this is usually treated as a priority debt.
Non-domestic rates
Non-domestic rates (business rates) are charged on most commercial property by local authorities. They are based on a national valuation and fixed amounts are charged across England and Wales in proportion to this.
The legal position
Non-domestic rates are payable under the Local Government Finance Act 1988.
Special features
Arrears are recovered through a liability order in the magistrates’ court. If enforcement agents (bailiffs) are used by a local authority after it has obtained a liability order, there is no exemption for tools, books, vehicles or goods that are necessary for use in the client’s business (as there is for council tax arrears).1Reg 14(1A) Non-Domestic Rating (Collection and Enforcement) (Local Lists) Regulations 1989, No.1058 Once a business ceases trading, it may be able to claim local discounts or reliefs from non-domestic rates and advisers should check with the local authority what is available. If the business is renting premises under a lease, it continues to be liable for the non-domestic rates for as long as the lease exists.
Local authorities can reduce or write off arrears of non-domestic rates in situations of severe hardship.2s49 LGFA 1988 This is most appropriate in cases of business failure and should always be sought before considering payment.
 
1     Reg 14(1A) Non-Domestic Rating (Collection and Enforcement) (Local Lists) Regulations 1989, No.1058 »
2     s49 LGFA 1988 »
Checklist for action
Advisers should take the following action.
    •Consider whether emergency action is necessary (see Chapter 8).
    •Consider an application for a DRO. Non-domestic rates are a qualifying debt in a DRO (see here).
    •Check liability for the debt, including any associated enforcement agent’s charges. Consider whether there are any grounds for a complaint.
    •Assist the client to choose a strategy from Chapter 8 because this is a priority debt if there is a risk of the client losing essential goods. Otherwise, the arrears are a non-priority debt. Assist the client to choose a strategy from Chapter 9.
Tax credit overpayments
Child tax credit and working tax credit are means-tested tax credits administered by 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, which may lead to an underpayment or overpayment.
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 See also askcpag.org.uk/content/203549/tax-credits-and-coronavirus.
 
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 (IS), jobseeker’s allowance (JSA), employment and support allowance (ESA) and pension credit, provided the client consents; or
    •by transferring the debt to the Department for Work and Pensions (DWP) to recover from universal credit (UC) and new style contribution-based ESA or JSA, without client consent. The DWP may use any other means at its disposal, including direct earnings attachments or through the courts. (HMRC has said it will not transfer a tax credit debt to the DWP if there is an outstanding dispute or appeal.);5Para 7.4, Government response to the Public Accounts Committee, 31 March 2018 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 £1,000 and you must usually be left with a minimum of £5,000 in your account/s; or
    •by a direct earnings attachment (see here); or
    •by treating it as unpaid tax, which can be pursued by taking control of goods or by court action.
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.6s37(1) 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     Para 7.4, Government response to the Public Accounts Committee, 31 March 2018 »
6     s37(1) 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 email to CPAG, 1 August 2018
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 (in writing, it is advisable to use form WTC/AP) 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 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 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.
A remission may be cancelled if circumstances change and the client is in a position to repay. 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.2HMRC, Debt Management and Banking Manual, 555600 & 585185 HMRC refers to the Money Advice Trust Debt and Mental Health Evidence Form 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 email to CPAG, 1 August 2018 »
2     HMRC, Debt Management and Banking Manual, 555600 & 585185 »
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, UC or under direct earnings attachments.
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.
    •Check to see if an application for breathing space would be an appropriate course of action (see here).
    •Consider an application for a DRO. Tax credit overpayments are a qualifying debt in a DRO regardless of whether they are classified as priority or non-priority debts (see here).
    •Consider whether you can persuade the 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 how they are recovered. HMRC must notify the client which method of recovery it is pursuing. If HMRC recovers the overpayment by treating it as unpaid tax, that becomes a priority debt. If HMRC recovers the overpayment by deduction from ongoing award or by transferring the debt to the DWP to recover, it is a non-priority debt. Assist the client to choose a strategy from Chapter 8 if it is a priority debt or Chapter 9 for a non-priority debt.
Value added tax
Value added tax (VAT) is a tax charged by HMRC on most transactions of businesses with an annual taxable turnover of more than a certain limit, set annually. A business must be registered for VAT unless its turnover is below the limit.
The legal position
VAT is payable under the Finance Act 1972 and the Value Added Tax Act 1994, and subsequent regulations and amendments. Its scope and level are reviewed each year and changes are often made to the Act following the Budget.
Special features
VAT is a tax on the value added to goods and services as they pass through the registered business. So, although VAT is payable on purchases, this amount can be offset against the tax on the business’s own sales. For example, if the total purchases in a year were £100,000 and the total sales were identical, there would be no value added and no tax payable.
A debt adviser generally encounters VAT debts after a business has ceased trading and the partner or sole trader is left responsible for VAT (see Chapter 16). Some goods are exempt and the calculation of the amount of VAT is complicated. In most cases, seek help from an accountant specialising in VAT. If VAT is overdue, a surcharge, which is a percentage of the VAT owed, is added to the debt. This amount can be appealed.
Checklist for action
Advisers should take the following action.
    •Consider whether emergency action is necessary (see Chapter 8).
    •Consider whether the client should be referred to a specialist agency – eg, TaxAid.
    •Otherwise, assist the client to choose a strategy from Chapter 8 because this is usually treated as a priority debt if the business is continuing to trade. If the business is no longer trading, the arrears are a non-priority debt. Assist the client to choose a strategy from Chapter 9.
Benefit overpayments
A benefit overpayment is either:
A benefit overpayment can be caused by:
    •the client making a mistake on the application or by not disclosing information such as a relevant change in circumstances;
    •benefit provider error (official error); or
    •overpayments built into the award system (HMRC administered tax credits).
 
1     gov.uk/government/publications/benefit-overpayment-recovery-staff-guide/benefit-overpayment-recovery-guide »
The legal position
Benefits are awarded under the relevant social security act for that particular benefit. The right to recover overpaid benefits fall under the Social Security Administration Act 1992 and The Social Security (Overpayments and Recovery) Regulations 2013.
DWP benefits and overpayments for UC and ‘new style’ JSA and ESA can be found in Advice for Decision Making (ADM) Chapter D1.1assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/938606/admd1.pdf Guidance on other benefits appears in Decision Makers’ Guide (DMG) Chapter 09: Overpayments, Recoverability, Adjustments, Civil Penalties and Recoupments.2assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/957584/dmgch09.pdf The government’s Benefit overpayment recovery guide3gov.uk/government/publications/benefit-overpayment-recovery-staff-guide/benefit-overpayment-recovery-guide applies to social security benefits other than housing benefit (HB).
Guidance on fraud investigations and prosecutions can be found in Fraud investigations: staff guide4gov.uk/government/publications/fraud-investigations-staff-guide and Crown Prosecution Service’s Prosecuting welfare and health fraud cases.5cps.gov.uk/legal-guidance/prosecuting-welfare-and-health-fraud-cases
Guidance is also provided on local authority administered HB.6gov.uk/government/publications/housing-benefit-overpayments-guide
 
1     assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/938606/admd1.pdf »
2     assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/957584/dmgch09.pdf »
3     gov.uk/government/publications/benefit-overpayment-recovery-staff-guide/benefit-overpayment-recovery-guide »
4     gov.uk/government/publications/fraud-investigations-staff-guide »
5     cps.gov.uk/legal-guidance/prosecuting-welfare-and-health-fraud-cases »
6     gov.uk/government/publications/housing-benefit-overpayments-guide »
Special features
 
Investigating whether a benefit overpayment has taken place
If it comes to a benefit provider’s attention that a benefit overpayment may have taken place, a decision maker considers the available evidence. This may involve an investigation interview with the client.
 
Decision that a benefit overpayment has taken place
If the decision maker has enough evidence to support a claim that an overpayment has taken place, the original decision to award benefit will be revised or superseded.
Benefit overpayments run from either date of:
    •award – if the cause is information not disclosed or the wrong information is applied on application; or
    •‘effective date’ of a change of circumstance. (The effective date occurs when the change impacts on payment, which is not necessarily the date when the change occurred.)
The decision that an overpayment has taken place is in three parts:
    •new or revised entitlement to benefit;
    •assessment of recoverability of overpayment; and
    •recoverability decision.
 
Liability
The person who claimed the benefit is generally the liable person.
In cases of couples:
    •status-based and contribution-based benefits are claimed by one person in the relationship;
    •for all income-based benefits ‘joint and several liability’ applies.
In certain circumstances, a third party may be held liable for the overpayment:
    •executor of the estate for a deceased claimant;
    •a landlord (if HB/housing element was paid direct to the landlord);
    •an appointee dealing with the claimant’s finances.
Right to recover
If an overpayment is caused by the client either failing to disclose or misrepresenting a material fact or by proven fraud, or if the overpayment was paid to a third party, then the overpayment is always recoverable.
However, if the cause is the benefit provider making a mistake in awarding benefit, that is deemed to be an official error and is never recoverable.1CPAG vs Secretary of State for Work and Pensions 2012
The exception to the rule is any overpayment of new-style benefits (contribution-based JSA, contribution-based ESA and UC). These benefits are always recoverable, regardless of the overpayment being caused by official error.
 
1     CPAG vs Secretary of State for Work and Pensions 2012 »
Calculation of the overpayment
The original decision to award benefit is replaced by a new decision to either:
    •award a revised amount of benefit; or
    •remove entitlement to benefit altogether.
 
Reducing the balance of overpayment
An overpayment balance may be reduced by offsetting underlying entitlement to another benefit (which otherwise would have been in payment). This is a complex area and specialist benefits advice should be sought.
On the separation of a couple, the amount of an overpayment of UC is divided 50/50 between the pair.
Notification
On making a decision that a benefit overpayment has taken place, the benefit provider notifies:
    •the liable person – by way of a formal benefit overpayment letter; and
    •other benefit providers – DWP notifies the local authority of the overpayment (and vice versa).
The ‘daisy chain’ effect
A decision that a person is not entitled to a means-tested benefit (which may be followed by a decision that an overpayment has occurred), prompts a local authority to query a person’s claim for HB, which may, in turn, lead to a decision that an overpayment of HB has occurred. Equally, a decision that a person is not entitled to, for example, personal independence payment (PIP) or disability living allowance (DLA), and potentially that an overpayment has occurred, may mean the loss of entitlement to an element of a means-tested benefit (eg, a disability premium of IS, contribution-based JSA, contribution-based ESA and/or HB) and potentially an overpayment of that benefit, too.
Each overpayment is a separate debt in itself and requires a separate notification sent to the client.
Right to appeal
A client has the right to appeal the decision that an overpayment of benefit has taken place.
An application for mandatory reconsideration (a request that the decision be looked at again) must be submitted within one month of the date of the overpayment letter.
If a client request for a mandatory reconsideration (concerning tax credits and benefits other than HB) does not lead to the decision being changed (or not changed to the extent requested), s/he can submit an appeal against the decision to the HM Courts & Tribunal Service (HMCTS). The appeal is considered by an independent First-tier Tribunal, including a judge. Appeals must be requested within one month of the date of the mandatory reconsideration outcome notice being served on the client. The deadline for requesting a mandatory reconsideration can be extended by 12 months in some circumstances.1ADM A3: Revision para A3050-A3057 and DMG Chapter 03 para 0370-0379
If the benefit concerned is housing benefit (HB), there is no requirement for a mandatory reconsideration before an appeal can be requested. Requests for an appeal about an HB decision should be submitted to the local authority rather than HMCTS. An overpayment caused by an official error can be subject of a mandatory reconsideration made outside the normal extended time limits. The client should seek advice if the standard time limits for a mandatory reconsideration have passed or if you think the overpayment was caused by an official error.
To identify grounds (and caselaw supporting the client’s case), specialist benefits advice should be sought.2Seek advice from organisations such as Advicelocal (advicelocal.uk) and CPAG (cpag.org.uk/welfare-rights/advice-service).
 
1     ADM A3: Revision para A3050-A3057 and DMG Chapter 03 para 0370-0379 »
2     Seek advice from organisations such as Advicelocal (advicelocal.uk) and CPAG (cpag.org.uk/welfare-rights/advice-service). »
Fraud
When a decision that a recoverable overpayment has taken place is reached, the benefit provider considers if the overpayment may also be a fraudulent overpayment.
A fraudulent overpayment occurs when the client has made an application or failed to report a relevant change in circumstances with the intent to obtain benefit by deception.
Fraudulent overpayments can be divided into:
    •an allegation that a fraudulent overpayment has taken place; and
    •a benefit provider proving that a fraudulent overpayment has taken place.
Until such time as the overpayment becomes a proven fraudulent overpayment, for the purposes of collection rates and in insolvency, the overpayment remains an allegation of fraud.
For the overpayment to be deemed a fraudulent overpayment, one of three tests must apply:
    •admission at interview after caution;
    •offer and acceptance of an administration penalty;
    •successful prosecution at the magistrates’ court.
 
Admission during formal interview
Fraud investigations can involve a ‘summons’ to a formal interview. Attendance at interview is voluntarily.
At interview, the client is informed that the interview is being conducted under the Police and Criminal Evidence Act 1984:
    •The interview will be recorded.
    •The client has the right to legal representation. If s/he has not brought a legal representative and wishes to do so, the interview will be suspended while s/he seeks a representative.
    •A formal caution is imposed.
If the client admits making a fraudulent application for benefit under caution, the overpayment is automatically deemed to be fraudulent. An admission or disclosure during interview maybe used in any future prosecution.
 
Administration penalty
At the benefit provider’s discretion, a client may be offered an administration penalty as an alternative to prosecution.1s115A Social Security Administration Act 1992 An administration penalty is, in effect, a plea bargain.
If the client is offered and accepts an administration penalty in return for not being prosecuted, s/he agrees to:
    •repay the overpayment in full; plus
    •pay an additional amount (based on a percentage of the overpayment and capped at £5,000) as a penalty.
If the client accepts the offer of an administration penalty, it is deemed to be a fraudulent overpayment.
 
Prosecution
Regardless of whether the client admitted or denied fraud at interview, or when an offer of an administration penalty was declined by the client, a case may be passed to the Crown Prosecution Service for consideration for prosecution.
If a decision to prosecute is made, the client will be summonsed to attend the magistrates’ court.
If the client pleads guilty or is found guilty, s/he may face:
    •a fine (plus costs);
    •sentencing to a term of imprisonment of up to seven years; and/or
    •an ‘assets recovery order’.
If the client is found not guilty, the overpayment is still recoverable. Magistrates only consider the charge that benefit was obtained by deception, not the fact that a recoverable overpayment took place.
 
Linked fraudulent claims
Admission at interview, accepting an administration penalty or a successful prosecution means that any separate benefit overpayment linked to the original overpayment is also deemed to be fraudulent.
 
1     s115A Social Security Administration Act 1992 »
Recovery action
Benefit providers can recover by:
    •deductions from ongoing payment of benefit – an overpayment of one benefit can be recovered from another in ongoing payment, with several exceptions since some benefits cannot be deducted from. If only one member of the couple is the liable person, the DWP can apply a deduction from the jointly claimed benefit.
    •application for a direct earnings attachment – for clients in PAYE employment only. Applications can be made direct to the client’s employer without the need of a court order.
Appeals and direct recovery
If the client has appealed the decision that a recoverable overpayment of benefit has taken place:
    •for UC and contribution-based JSA and ESA the direct recovery continues. If the client is successful at appeal, the amount deducted is refunded to the client; or
    •for other benefits – recovery is suspended pending the outcome of the appeal.
Other recovery methods
Other recovery methods include use of:
    •debt collection agencies;
    •enforcement by the county court or the High Court – on registering the overpayment as a judgment (and default), benefit providers can utilise court enforcement processes, enforcement officers (bailiffs), charging orders, attachment of earnings and third-party orders;
    •only for council tax support (sometimes referred to as council tax reduction) – removal of council tax support credited to the client’s council tax account. This creates ‘council tax in arrears’ and a revised council tax demand notice being issued.
As removing council tax support creates ‘council tax in arrears’ and non-payment will lead to council tax recovery procedures, it automatically becomes a priority debt.
Direct recovery rates
There are three different rates of recovery:
    •non-fraudulent overpayments;
    •fraudulent overpayments;
    •for UC only, when the client earns more than the work allowance.
The rate of recovery by a deduction from benefits is set in legislation.
    •For UC, maximum deduction rates are based on percentage of UC personal allowance; lower amounts can be deducted to repay overpayments.
    •For other benefits, the recovery rate is set at a fixed weekly amount. Benefits and tax credits overpayments that are recoverable may be transferred to UC and recovered accordingly.
Direct earnings attachment
The client’s employer is served notice of a direct earnings attachment and a chart detailing how to calculate the rate of earnings deduction. The deduction rate is set at a percentage of wages. Wages are broken into bands. Each band has its own percentage rate (see below).
Standard direct earnings attachment rates
Deductions from earnings
Employee’s weekly pay
Employee’s monthly pay
Nothing to deduct
£100 or less
£430 or less
3%
£100.01 to £160
£430.01 to £690
5%
£160.01 to £220
£690.01 to £950
7%
£220.01 to £270
£950.01 to £1,160
11%
£270.01 to £375
£1,160.01 to £1,615
15%
£375.01 to £520
£1,615.01 to £2,240
20%
More than £520
More than £2,240
Higher direct earnings attachment rates
Deductions from earnings
Employee’s weekly pay
Employee’s monthly pay
5%
£100 or less
£430 or less
6%
£100.01 to £160
£430.01 to £690
10%
£160.01 to £220
£690.01 to £950
14%
£220.01 to £270
£950.01 to £1,160
22%
£270.01 to £375
£1,160.01 to £1,615
30%
£375.01 to £520
£1,615.01 to £2,240
40%
More than £520
More than £2,240
Negotiating repayment plans
If the client is in:
    •receipt of benefit, a deduction from benefit will be in place;
    •in PAYE employment, a direct deductions order may be in place.
If the client is not claiming benefit and does not have a payment plan in place, benefit providers have discretion to accept a negotiated repayment plan or if direct deductions are in place and they are causing financial hardship, benefit providers also have discretion to accept a reduced rate of direct deduction from benefit. In practice, the DWP does not in general deduct more than an amount equivalent to 25 per cent of the claimant’s standard allowance from their UC entitlement to repay debts, including benefit overpayments, payments to third parties and the repayment of advances.
A reduction in a direct earnings attachment is also at the benefit provider’s discretion.
The client or adviser simply contacts the benefit provider with a written request for a reduction that outlines the reason why the rate of deduction is causing financial hardship and outlining any other extenuating circumstances.
A standard financial statement should be attached.
Advisers use local knowledge on whether the local authority accepts a standard financial statement. If not, a more detailed explanation of expenditure/further negotiation may be required.
A reduced rate of recovery (from benefit or wages) is time limited. The client must seek to renegotiate the lower payment rate before the concession ends. Otherwise, the repayment rate defaults back to the standard rate.
Payment in full (and reinstatement of benefit)
If the client has capital in excess of the income-based benefits limits, s/he may wish to consider repaying the debt.
Income-based benefit may then be reinstated in full or part.
Voluntary write off
Benefit providers have discretionary powers to voluntarily write off overpayments on grounds of severe hardship.
The client should write to the benefit provider with details of how the overpayment is otherwise unresolvable.
If council tax support is removed, creating council tax arrears, these may be written off by using a s13A Local Government Act application (see here).
In the case of DWP overpayments, the DWP can write off the debt where:
    •it does not consider that further action to recover the debt is warranted on costs grounds; or
    •it considers the debt is unrecoverable (in a case where all options for recovery have been exhausted and there is no reasonable expectation of recovery.
In other cases, the DWP can grant a ‘waiver’ of the debt. DWP guidance states: ‘Waivers are only granted in exceptional circumstances and there would need to be very specific and compelling grounds to do so’.1Chapter 8, section 8.2, Benefit overpayment recovery guide, available at: tinyurl.com/yks47my8 The guidance refers to recovery of the debt causing financial hardship or welfare issues for the client or her/his family. Whilst this suggests that the waiver request must be on one or other of those grounds, section 8.5 of the guidance appears to confirm that this is not the case: ‘All factors which appear relevant should be considered along with the individual circumstances of the case. A request for a waiver can be made for a variety of reasons or may be a combination of factors that when brought together build the reason for the request’. Section 8.4 contains a statement that the DWP will consider the client’s ‘entire circumstances as far as they are known’ together with a non-exhaustive list of factors where appropriate, but it is not clear how these will apply in practice.2For an example where the High Court decided that the DWP’s decision not to waive recovery of a UC overpayment caused by official error was unlawful on the grounds it had failed properly to take into account: (i) whether recovery was in the public interest and (ii) the claimant had relied on the overpayment to her detriment, see R (on the application of K) v Secretary of State for Work & Pensions [2023] EWHC 233 (Admin)
It appears that the financial hardship needs to be ‘severe’ such that it would not be reasonable to expect the client to make even reduced payments and that it must be demonstrated that the situation has been longstanding and is not expected to improve in the foreseeable future. Evidence in support of this ground should include:
    •full details of the income and expenditure of the client, her/his family and any other members of the household;
    •a full list of the client’s debts and the steps taken to manage those debts with the creditors concerned;
    •bank statements for the previous six months (which may not reflect the current or future situation necessitating an explanation of any change(s) in circumstances); and
    •any other relevant information -eg, correspondence from creditors regarding debts or arrears.
The DWP does not subscribe to the SFS and so you should not assume they will accept the SFS summary page as sufficient evidence of financial hardship without question. For example, if non-dependents are not contributing to the household, the DWP may argue that they should do so. In addition, not only may they require a more detailed breakdown of what is comprised under the various SFS headings but also they may query or even object to individual items. For example, the DWP may not accept PIP or disability premiums/elements being off-set under ‘care costs’ and may require a detailed breakdown of such costs.
Evidence in support of a request on grounds of ill health should be provided in the form of a letter from a medical professional, such as GP, consultant or psychiatric nurse, but additional supporting evidence from -eg, a support worker may also be provided. The evidence should not be merely a list of medical conditions, but must specifically confirm the effect recovery of the overpayment is having on the client’s health in the writer’s opinion.
Recovery of the overpayment continues while the DWP considers the waiver request. Only recovery of the balance outstanding at the time the decision is made can be waived. There is no right of appeal against a decision not to grant a waiver. However, where a waiver is not granted, the DWP will consider whether a reduction in the rate of repayment or a suspension of recovery is appropriate for an agreed period -eg, to enable the client to seek a debt solution involving all her/his creditors (see section 8.14 of the guidance) and you should ensure this is considered, where applicable.
 
1     Chapter 8, section 8.2, Benefit overpayment recovery guide, available at: tinyurl.com/yks47my8  »
2     For an example where the High Court decided that the DWP’s decision not to waive recovery of a UC overpayment caused by official error was unlawful on the grounds it had failed properly to take into account: (i) whether recovery was in the public interest and (ii) the claimant had relied on the overpayment to her detriment, see R (on the application of K) v Secretary of State for Work & Pensions [2023] EWHC 233 (Admin) »
Insolvency
Benefit overpayments are provable debts for the purposes of bankruptcy and qualifying debts in a DRO. Benefit overpayments are written off upon discharge from bankruptcy or the end of the DRO moratorium, with the exception of fraudulent overpayments.
For:
    •a DRO, it is the date of the original decision that a benefit overpayment has taken place and communicated to the client that counts. If the decision is earlier than the date of the DRO application, the overpayment is a qualifying debt;
    •a bankruptcy, if the overpayment period is either before the date of the bankruptcy order or spans the bankruptcy order, recovery should be suspended until the end of the bankruptcy regardless of the date the decision was made (including after the date of the bankruptcy order) and on discharge the outstanding balance should be written off (unless fraudulent).1Para 6.8 Benefit Overpayment Guide
    •an IVA, the benefits agency is bound by the terms of the IVA if the overpayment was included in that agreement.
A proven fraud debt is a qualifying debt in a DRO and provable in bankruptcy. Recovery is suspended for the period the client is in the DRO moratorium, and before s/he is discharged from bankruptcy. The right to recover the overpayment is reinstated when the client is discharged from bankruptcy or reaches the end of the DRO moratorium.
In the case of a housing benefit overpayment being recovered from universal credit or another benefit, recent DWP guidance has confirmed that the local authority should recall the debt from Debt Management to avoid deductions being made during a DRO moratorium or while a client is undischarged from bankruptcy.
Ongoing fraud investigations and insolvency
In cases of an ongoing fraud investigation, the overpayment is not a proven fraud until one of the three tests applies. The fraud investigation can continue.
Insolvency deals with the recovery of the overpayment only; a benefit provider may continue with a fraud investigation/prosecution action.
If, at any time after the award of DRO or the making of the bankruptcy order, the client:
    •admits fraud during an interview held under caution; and/or
    •accepts an administration penalty; or
    •is prosecuted and is ether found guilty or pleads guilty;
then the overpayment automatically becomes a fraudulent debt.
This means that post-moratorium/discharge from bankruptcy, the benefit provider is then free to take steps to recover the overpayment.
Fraud and insolvency restrictions orders
Fraud is an offence in insolvency legislation. A proven fraud debt may lead to the imposition of a restrictions order.
The application forms for either a DRO or bankruptcy do not ask the applicant to declare whether the debt is fraudulent.
A benefit provider, on notification of either a DRO or a bankruptcy order, may contact the official receiver and flag up the fact that the debt is a proven fraud overpayment. The official receiver may then launch an investigation and potentially impose an insolvency restrictions order.
Insolvency applications: good practice in dealing with fraudulent overpayments
If either the overpayment is proven fraud or subject to an ongoing investigation, it is good practice for the advisers to have the following discussion with the client.
Advise the client that:
    •fraudulent overpayments form part of the insolvency application;
    •recovery of the overpayment is frozen for as long as the insolvency is in force, usually 12 months;
    •a proven fraud debt becomes recoverable post-discharge;
    •a fraud investigation will continue regardless of insolvency;
    •a proven fraud debt may result in a restrictions agreement or order being made against her/him.
Given that a non declaration that the debt is a proven fraudulent overpayment, it may well lead to:
    •a longer period of restrictions than otherwise would have been imposed if the information had been declared voluntarily;
    •intermediary may receive an enquiry from Insolvency Service asking if s/he was aware of the fraudulent nature of the overpayment and what advice did s/he give the client.
The fact that the conversation took place, the advice given and the client’s response should be case recorded and referenced in a client care letter.
 
1     Para 6.8 Benefit Overpayment Guide »
Historical overpayment – ‘abandonment’ and Limitations Act 1980
If a client either vanishes, refuses to engage or otherwise breaks a payment arrangement (and the DWP/local authority cannot apply a direct payment from benefit or deduction from wages) both the DWP and the local authority ‘archive’ unrecovered overpayments.
The DWP has a protocol for ‘abandonment of collection action’ overpayments after set periods of time have passed. For:
    •sums less than £100, it is six years;
    •sums less than £300, it is 10 years; and
    •any other amount, it is 20 years.
The debtor is sent to prison and the sentence does not relate to a benefit offence, the debt may be written off when the length of the sentence and balance outstanding satisfy the following criteria.
Sentence
Overpayment classification
Amount of debt
3 to 10 years
Mistake by debtor
Less than £500
5 to 10 years
Fraud
Less than £500
10 years or more
Mistake or fraud
Any amount
The DWP also abandons recovery action if the client has:
    •been deported; or
    •moved abroad; and
    •a UK benefit is not payable in the country the client is living in; and
    •a benefit such as retirement pension will not be payable at some future point.
Under the Limitations Act 1980, a benefit provider has six years from the date of the benefit overpayment to register the overpayment as a county court or High Court judgment.
Outside of the six-year statutory period:
    •a benefit provider may utilise either a deduction from benefit or a direct earnings attachment; and
    •council tax reduction can be removed and a revised council tax demand notice sent. (The Limitation Act only limits the right to seek a liability order, not to revise a council tax demand. If a revised bill is served, a new limitation period applies.)
Checklist for action
Advisers should take the following action.
    •Consider whether the overpayment is linked to other benefit overpayments (the ‘daisy chain’ effect).
    •Check whether the overpayment is subject to a fraud investigation or is a proven fraud debt.
    •Check if the client has grounds/is in time for a late application to challenge the benefit overpayment decision.
    •Check to see if an application for breathing space would be an appropriate course of action (see here).
If the overpayment is recoverable, it is a ‘square-peg’ debt, and what the benefit provider can do to recover depends on the client’s circumstances. Check which options are open to the client:
    •reducing existing deductions from benefit/wages;
    •negotiating a voluntary repayment plan;
    •using existing assets to repay in full or part; or
    •insolvency (see Chapter 10).