Debt Advice Handbook 15th 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 firm 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 debts, 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 if a breathing space application would be appropriate (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. »
The legal position
The obligation to pay council tax is created by section 4(1) of the Local Government Finance Act 1992 (LGFA 1992). However, actual payment of council tax is generally required from the adult individuals who are residents of ‘chargeable dwellings’ (although there are exceptions where payment is required from a non-resident owner). Regulation 22 of the Council Tax (Administration and Enforcement) Regs 1992 provides that no payment of the chargeable amount needs to be paid ‘unless a notice served under this Part requires it’ – ie, Part V of the Regulations. Regulation 18 requires each ‘billing authority’ (ie, the relevant local authority) to ‘serve a notice in writing’ (described as a ‘demand notice’ but which many local authorities describe as a ‘bill’) which ‘shall require the making of payment’.
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).1s13A LGFA 1992
 
1     s13A LGFA 1992 »
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 on 1 April 2005. The Welsh government is considering revaluation, using a valuation date of 1 April 2023.1See gov.wales/fairer-council-tax-phase-2 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 you should check to ensure that exemption has been applied, if appropriate.
 
1     See gov.wales/fairer-council-tax-phase-2 »
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 their 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. This should be checked. In addition, in certain cases, there are reductions for people with disabilities (including dependent children) whose homes have been modified or if a disabled resident uses a wheelchair in the home. 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 their tenancy, a former tenant who no longer occupies the property could come into this category1Leeds City Council v Broadley [2016] EWHC 1839. 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. Members of a couple are jointly liable. A single bill is sent, either in the name of one of the persons concerned, or in both names.
Some people are disregarded and may be exempted from being counted as being residents living in the property. These include full-time students, people who are ‘severely mentally impaired’, unpaid carers, people held in detention and children under 18. See CPAG’s Council Tax Handbook for details.
Detention includes a client who 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’s Specialist Debt Advice Service, ‘Q&A’, Quarterly Account 52, IMA
No council tax is payable on properties in which only people who are severely mentally impaired and/or are students reside.
While a person with a severe mental impairment certificate is ‘invisible’ for council tax purposes, if they share the property with a ‘visible’ adult and they are equal to or above the visible adult on the hierarchy of liability, they are either solely or jointly and severally liable for payment of council tax.
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 in 10 monthly instalments, but must offer the option of paying in 12 instalments, if requested. 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.
 
1     Leeds City Council v Broadley [2016] EWHC 1839. 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’s Specialist Debt Advice Service, ‘Q&A’, Quarterly Account 52, IMA »
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 if a breathing space application would be appropriate (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
HMRC’s current approach to collecting tax debts 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 can 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 fail to respond to communications, HMRC says 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 completing 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 they are permanently unable to work because of ill health or if they have no hope of increasing their income because of their 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 a breathing space application would be appropriate (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. Self-employed earners must pay class 2 contributions 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 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, they may be liable for class 1 NI contributions for the employee, as well as class 2, and perhaps 4, contributions for themself.
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 if a breathing space application would be appropriate (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 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 to see 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 the client is at risk of losing essential goods. Otherwise, the arrears are a non-priority debt. Assist the client to choose a strategy from Chapter 9.
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 calculating 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’ occurs when a client is paid more benefit than they are entitled to. There are many reasons why benefits are overpaid – eg:1gov.uk/government/publications/benefit-overpayment-recovery-staff-guide/benefit-overpayment-recovery-guide
    •the client making a mistake on the application;
    •late reporting, or non-disclosure, of a relevant change of circumstances;
    •deliberate fraud by the claimant;
    •benefit provider error (‘official error’);
    •interim and advance payments of benefits that could not be recovered in full by the end of the claim.2While not technically overpayments, advance payments rebut, for collection purposes, the right to deduction from benefit or direct earnings attachments, government guidance groups them together.
See CPAG’s Welfare Benefits and Tax Credits Handbook for detailed information about benefit overpayments.
 
1     gov.uk/government/publications/benefit-overpayment-recovery-staff-guide/benefit-overpayment-recovery-guide »
2     While not technically overpayments, advance payments rebut, for collection purposes, the right to deduction from benefit or direct earnings attachments, government guidance groups them together. »
The legal position
The right to recover overpaid benefits falls under the Social Security Administration Act 1992 and The Social Security (Overpayments and Recovery) Regulations 2013.
DWP benefits and overpayments for universal credit (UC) and ‘new-style’ jobseeker’s allowance (JSA) and employment and support allowance (ESA) can be found in Advice for Decision Making (ADM) Chapter D1.1assets.publishing.service.gov.uk/media/62b31ae6e90e0765d091f29b/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/media/6572f2ef33b7f20012b720db/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 the 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/media/62b31ae6e90e0765d091f29b/admd1.pdf »
2     assets.publishing.service.gov.uk/media/6572f2ef33b7f20012b720db/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 an overpayment may have taken place, a decision maker considers the available evidence. This may involve an investigation interview with the client, checking official records, using formal ‘requests for information’ (eg, seeking copies of bank statements), magistrates’ court-mandated surveillance and ‘open source material’, such as social media accounts. In deciding whether an overpayment has occurred, the benefit provider considers if the client:
    •misrepresented (a written or oral statement in support of a claim is incorrect) a material fact; or
    •failed to disclose (did not answer a direct question correctly or report a change in circumstances) a material fact.
The terms ‘misrepresentation’ and ‘failure to disclose’ apply to innocent errors, omissions and deliberate fraud.
 
Decision that a benefit overpayment has taken place
If it is decided that there has been an overpayment, the original decision to award benefit is revised or superseded.
Benefit overpayments run from the date of the:
    •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 the recoverability of overpayment;
    •recoverability decision.
 
Liability
The person who claimed the benefit is generally the liable person.
In the 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 can be held liable for the overpayment:
    •the executor (or beneficiaries) of the estate for a deceased claimant;
    •an appointee dealing with the claimant’s finances;
    •a landlord (if HB/UC housing element was paid direct to the landlord).
In liability decisions regarding landlords, the DWP makes a decision based on how the overpayment took place. If it was:
    •due to a change of address, the overpayment is recoverable from both the claimant and/or the landlord;
    •a result of a misrepresentation or failure to disclose, the overpayment is recoverable from the person(s) who failed to disclose or misrepresented the material fact.
 
Notification
The benefit provider must send the liable person a formal letter. The notification must contain prescribed information, including:
    •how it was caused;
    •the period of the overpayment;
    •the amount of the overpayment;
    •evidence of how the overpayment has been calculated;
    •whether some or all of the overpayment can be offset and, if so, how offsets have been applied.
Advisers should ask for a copy of the overpayment letter and check it carefully when advising clients whether to challenge an overpayment decision.
 
Penalties
In addition, the letter may state that a civil penalty has been imposed. A civil penalty may be imposed where:
    •the overpayment arose as a result of the claimant negligently making an incorrect statement, and they failed to take reasonable steps to correct the error;
    •where the claimant failed to disclose information about their claim without a reasonable excuse;
    •where the claimant failed to inform the DWP of a relevant change of circumstances without a reasonable excuse.
A civil penalty signifies that the overpayment is not been treated as being fraudulent.
 
Fraud
If it is considered that an overpayment was made because of fraud, in addition to the overpayment being recovered, the client can be prosecuted or given the option of paying a penalty instead of going to court. See CPAG’s Welfare Benefits and Tax Credits Handbook for further information.
 
Right to recover
An overpayment is always recoverable if it is caused by the client failing to disclose or misrepresenting a material fact or by proven fraud, or if the overpayment was paid to a third party.
However, if the cause is the benefit provider making a mistake in awarding benefit, that is deemed to be an official error, and for DWP-administered benefits is never recoverable.1CPAG v SSWP [2010] UKSC 54 The exception to the rule is any overpayment of new-style benefits (UC, contribution-based JSA and contributory ESA). These benefits are always recoverable, regardless of the overpayment being caused by an official error.2s71ZB(1) Welfare Reform Act 2012; art 5(3A) Welfare Reform Act (Commencement No.8) Order 2013 No.358
In cases of official error and HB overpayments, unless the claimant or payee (eg, a landlord or agent of the landlord) could reasonably have been expected to realise that it was an overpayment, the overpayment is unrecoverable.3Reg 100(2) Housing Benefit Regulations 2006 No.213; reg 81(2) Housing Benefit (Persons who have attained the qualifying age for pension credit) Regulations 2006 No.214; Sandwell MBC v NK (HB) [2016] UKUT 140 (AAC); Towerwall Property Management v Wirral MBC (HB) [2012] UKUT 191 (AAC)
 
Reducing the balance of the 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 benefit advice should be sought.
On the separation of a couple, the amount of an overpayment of UC is divided 50/50 between the pair.
 
1     CPAG v SSWP [2010] UKSC 54 »
2     s71ZB(1) Welfare Reform Act 2012; art 5(3A) Welfare Reform Act (Commencement No.8) Order 2013 No.358 »
3     Reg 100(2) Housing Benefit Regulations 2006 No.213; reg 81(2) Housing Benefit (Persons who have attained the qualifying age for pension credit) Regulations 2006 No.214; Sandwell MBC v NK (HB) [2016] UKUT 140 (AAC); Towerwall Property Management v Wirral MBC (HB) [2012] UKUT 191 (AAC) »
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 award of 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), 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, contributory ESA and/or HB) and potentially an overpayment of that benefit too.
If excess council tax support has been credited, most councils ‘recover’ it by simply removing entitlement from the council tax account and, in effect, creating council tax arrears. The client is served with a revised council tax demand. Failure to pay entitles the council to take enforcement action to recover council tax arrears (see Chapter 14).
Each overpayment is a separate debt in itself and requires a separate notification letter to be sent to the client.
Right to appeal
A client has the right to appeal that they have been overpaid or the amount they been overpaid.
For benefits other than HB, 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 the mandatory reconsideration does not lead to the decision being changed (or not changed to the extent requested), the client can appeal to the independent First-tier Tribunal. Appeals must be requested within one month of the date of the mandatory reconsideration outcome notice. 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
For 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. 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.
Get specialist benefit advice to identify grounds (and caselaw supporting the client’s case): advicelocal.uk can help you find a local adviser.
 
1     ADM A3: Revision para A3050-A3057 and DMG Chapter 03 para 0370-0379 »
Recovery action
Benefit overpayments can be recovered by:
    •deductions from ongoing payment of benefit – an overpayment of one benefit can be recovered from another in ongoing payment;
    •a direct earnings attachment (for clients in PAYE employment only). Applications can be made direct to the client’s employer without the need for 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 new-style 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.
 
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 a 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 details of how to calculate the deduction. The deduction rate is set at a percentage of wages. Wages are broken into bands. Each band has its own percentage rate.
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 not having deductions made from their benefit or from earnings, benefit providers have discretion to accept a negotiated repayment plan. 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 deduct more than an amount equivalent to 25 per cent of the claimant’s UC standard allowance 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 can contact the benefit provider with a written request for a reduction that outlines the reason why the rate of deduction is causing financial hardship and 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. A more detailed explanation of expenditure/further negotiation may be required if not.
A reduced rate of recovery (from benefits or earnings) 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, they may wish to consider repaying the debt.
Income-based benefit may then be reinstated in full or part.
 
Voluntary write-off
Even if an overpayment is recoverable, benefit providers have the discretion not to recover (ie, to ‘waive’) all or part of it on the grounds of financial hardship.
The client should write to the benefit provider with details of how the overpayment is otherwise unresolvable.
The DWP’s policy on waiving recovery of an overpayment (including a UC overpayment) says that this will be done only in ‘exceptional circumstances’ and that there need to be ‘very specific and compelling grounds’ for doing so.1DWP, Benefit Overpayment Recovery Guide, June 2023 In practice, recovery is pursued in the vast majority of cases. There is no complete list of situations in which waiver will be granted, and if you request that recovery be waived, all relevant facts in your case must be taken into account. The guidance does list some of the factors that should be considered. These include:
    •the client’s financial circumstances;
    •the impact of recovery of the overpayment on the client’s health or the health of someone in family;
    •the client’s conduct (eg, if they acted in good faith and did all they could) and the DWP’s conduct (eg, was there an official error or unclear or confusing advice);
    •whether the client relied on the money overpaid so that recovery now leaves them in a detrimental situation;
    •whether in all the circumstances, recovery would be in the public interest.
The DWP’s decision is final. There is no right of appeal against a refusal to waive collection of an overpayment.
If council tax support is removed, creating council tax arrears, these may be written off under section 13A of the Local Government Finance Act (see here).
 
1     DWP, Benefit Overpayment Recovery Guide, June 2023 »
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 UC overpayments, unlike the division of tax credits between separated partners (see here): ‘Once this apportionment has been done we will not reverse the split liability decision. Any debt for which only one member of a couple is liable will follow that person on separation.’1DWP, Benefit Overpayment Recovery Guide, June 2023, para 2.23 As long as the separation (and the client was notified of the decision that a recoverable overpayment had taken place) took place before the DRO application, the balance that falls due for the purposes of the DRO is 50 per cent of the total overpayment.
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);2DWP, Benefit Overpayment Recovery Guide, June 2023, para 6.8
    •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 they are 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 an HB overpayment being recovered from UC or another benefit, 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.3DWP, Housing Benefit Recovery Guide, para 7.188
 
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 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 adviser 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 them.
Given that a non-declaration that the debt is a proven fraudulent overpayment, it may lead to:
    •a longer period of restrictions than otherwise would have been imposed if the information had been declared voluntarily;
    •an intermediary receiving an enquiry from the Insolvency Service asking if they were aware of the fraudulent nature of the overpayment and what advice they gave 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     DWP, Benefit Overpayment Recovery Guide, June 2023, para 2.23 »
2     DWP, Benefit Overpayment Recovery Guide, June 2023, para 6.8 »
3     DWP, Housing Benefit Recovery Guide, para 7.188  »
Abandonment and Limitations Act 1980
If a client 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:1DWP, Benefit Overpayment Recovery Guide, June 2023, Appendix 5
    •sums less than £100, it is six years;
    •sums less than £300, it is 10 years;
    •any other amount, it is 20 years.
Where 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.)
 
1     DWP, Benefit Overpayment Recovery Guide, June 2023, Appendix 5  »
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 if a breathing space application would be appropriate (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).
Tax credit overpayments
Child tax credit (CTC) and working tax credit (WTC) are means-tested tax credits administered by HMRC. Tax credit claimants are being ‘migrated’ to UC. It is expected that all tax credit awards will have terminated by 5 April 2025, and will not be renewed for 2025/26. See CPAG’s Welfare Benefits and Tax Credits Handbook for more details.
Overpayments of tax credits can arise, for example, if someone does not tell HMRC about a change in their circumstances, if they give it incorrect information or if their income 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 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.
The legal position
The main rules on overpayments are the same for CTC and WTC. They are set out in sections 28 and 29 of the Tax Credit Act 2002.
HMRC must issue an overpayment notice stating the amount to be repaid and the method of repayment it intends to use.1s29 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;2Reg 12A TC(PC) Regs 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
    •by transferring the debt to the DWP to recover from UC and new-style JSA or ESA, without client consent. The DWP may use any other methods, including direct earnings attachments (see here) 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 appeal3Para 7.4, Government response to the Public Accounts Committee, 31 March 2018); or
    •from income support (IS), JSA, ESA and pension credit, provided the client consents; or
    •through the PAYE system, provided the client does not object; or
    •direct from the client’s bank account – the debt must be more than £1,000 and the client must usually be left with a minimum of £5,000 in their accounts; 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. Note: the 50 per cent liability rule only applies if the client makes payment in full (as a lump sum or by instalments to the value of 50 per cent of the overpayment). As no further payment can be made following insolvency, the client’s liability should be listed as 100 per cent of the overpayment still outstanding in such proceedings. Liability automatically defaults to the previous partner if the client discloses domestic abuse as an issue, and so the implications of liability should be discussed with the client before making an application for insolvency.
Interest can be added to an overpayment if HMRC considers the overpayment occurred as a result of the client’s fraud or neglect.4s37(1) TCA 2002 The interest is recovered using the same methods as for overpayments.
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 a right of appeal against a decision to add interest to an overpayment, and against a decision to impose a penalty.
 
1     s29 TCA 2002 »
2     Reg 12A TC(PC) Regs »
3     Para 7.4, Government response to the Public Accounts Committee, 31 March 2018 »
4     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. Its code of practice, What happens if we’ve paid you too much tax credits, states that HMRC will not pursue repayment if:1gov.uk/government/publications/tax-credits-what-happens-if-youve-been-paid-too-much-cop26.
    •the overpayment was caused by HMRC failing to meet its ‘responsibilities’; and
    •the claimant has met all of their ‘responsibilities’.
It is important to check that the client’s tax credits have been calculated correctly and that they have, in fact, been overpaid. A client can appeal to the First-tier Tribunal about a matter concerning their tax credit entitlement, including whether an overpayment has occurred. They must ask for a mandatory reconsideration first.
A client cannot appeal to the 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 repayment.2HMRC, Debt Management and Banking Manual, 555600 & 585185 HMRC refers to the Money Advice Trust’s 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 them 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     gov.uk/government/publications/tax-credits-what-happens-if-youve-been-paid-too-much-cop26. »
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 if a breathing space application would be appropriate (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.