Tax Credits: ‘technical overpayments’ and ‘offsetting’
David Simmons examines the current state of play on the recurring issue of tax credits overpayments which arise when a partner leaves or joins a household.
[See also the update to this article published in issue 214 (February 2010)].
Overpayments of tax credits commonly arise when claimants either fail to notify the Revenue that a partner has left or joined the household, or delay doing so. There is a legal duty to notify the change of circumstances within a month,1 Reg 21(2)(a) Tax Credits (Claims and Notifications) Regulations 2002 and this terminates the claim and any entitlement to tax credits until a fresh claim is made by the now single person or couple.2 Sec 3(4) Tax Credits Act 2002; CSTC/724/06 Any amount paid from the date the claim should have terminated is a recoverable overpayment.3 Sec 28 Tax Credits ActIn many cases, however, claimants would have received the same amount of tax credits (or in some cases more) had they made the required notification on time and made a new claim on the basis of their changed status as a single claimant or a couple. Despite this, the Revenue seeks to recover the gross amount of the overpayment without offsetting the amount which would have been paid had the correct procedures been followed except in very limited circumstances (see below).
CPAG has long argued that overpayments which arise in these circumstances are ‘technical’ (because they result from the way the claims and termination rules operate) and should be offset by underlying entitlement at no cost to the Treasury. We also believe that the Revenue’s current policy of routinely recovering the gross overpayment is unlawful (see below). We have raised the issue with the Government but the response indicates an unwillingness to implement offsetting other than in exceptional cases (see below). This article, therefore, looks at the legal remedies open to advisers to secure offsetting of underlying entitlement.
In contrast to housing benefit,4 Reg 104 HB Regulations 2006there is no statutory provision within the tax credits scheme for offsetting underlying entitlement from an overpayment. There is also no right of appeal against a decision to recover an overpayment.5 Sec 38 Tax Credits Act Recovery is, however, discretionary 6 Sec 28(1) Tax Credits Actand a request can be made for recovery to be waived or partly waived on the basis of the offsetting of underlying entitlement. If the request is refused, the only legal recourse is judicial review proceedings.
Revenue policy on offsetting
The Revenue’s Code of Practice on overpayments (COP26) does not provide for, or refer to, ‘offsetting’. Until 17 May 2007, however, the Revenue operated a policy of offsetting underlying entitlement from the gross overpayment when it investigated a claim via an examination or enquiry (i.e. in compliance cases).7 Paras CCM 15510+ Claimant Compliance ManualFor investigations opened after that date, however, this only applies where claimants wrongly made a claim for tax credits as a single claimant or couple as the result of ‘genuine error’ – eg, a genuine misunderstanding of the rules about who constitutes a couple for tax credit purposes. It does not apply where an overpayment arises because of a failure to notify the arrival or departure of a partner i.e. a change of circumstances during an award.8 Paras CCM15605+ Claimant Compliance ManualOn the face of it, it also does not apply where a case is not formally investigated – ie, it is not a compliance case.
CPAG believes the revised policy is unlawful because it constitutes an unlawful fettering of the Revenue’s discretion to recover an overpayment. It is also unfair to apply two different policies depending on whether a case is formally investigated under the compliance procedures or dealt with under the procedures in the COP26, and whether an investigation was opened before or after 17 May 2007.
Requesting offsetting and threatening judicial review
Decisions to recover the gross amount of an overpayment without offsetting underlying entitlement can be challenged by firstly making a written request for offsetting and then, if the request is refused, threatening judicial review proceedings on the grounds referred to above.
The initial request should take the form of a letter to the Tax Credits Office (rather than using the form TC846 referred to in the COP26). If the request is refused or ignored, a letter threatening judicial review proceedings can be sent to the Revenue’s solicitor’s office.9 South-West Wing, Bush House, Strand, London, WC2B 4RDCPAG has successfully secured offsetting in a number of cases in this way. Our solicitor has drafted two standard ‘letters before claim’ (depending on whether the overpayment was incurred by a single claimant or couple) which can be used by advisers to threaten judicial review. They need to be carefully checked and adapted to reflect a client’s individual circumstances, and whether the case would need to be referred to another organisation for proceedings to be pursued.
It is important to bear the following points in mind when threatening judicial review.
Claimants must have requested offsetting and received a refusal (or no response within a reasonable period) prior to sending the letter before claim.
The claimant may also have grounds for requesting waiving of the overpayment using the COP26 procedure (see below). Note that if s/he notified the DWP that her/his partner had left or joined the household, details of this should also be included in the request for offsetting and the letter before proceedings, as the Revenue has remitted overpayments on this basis in a number of cases where judicial review has been threatened.
The letter before claim does not commit you to issuing proceedings or referring the matter to a solicitor. It is hoped that the threat of proceedings is sufficient to secure offsetting. If the Revenue refuses to change its decision, however, issuing proceedings will require the services of a solicitor (and normally eligibility for legal funding).
Pre-action protocol requires that the Revenue is given 14 days to respond to the letter (in urgent cases, a shorter deadline may be appropriate) before proceedings are issued. Judicial review is subject to a strict time limit. Proceedings must be issued expeditiously and in any event within three months of the date of the decision which is being challenged (in this case, the decision refusing to offset). Judicial review cannot generally be threatened or pursued where the decision was made more than three months previously.
Judicial review is two-stage procedure (permission to proceed must first be sought and granted) for reviewing public decisions in the High Court (Administrative Court). Proceedings can take many months to conclude, although there is provision for urgent interim applications. If a case is lost, the loser is normally required to pay the other side’s costs, but this risk is considerably reduced where the claimant has legal funding (legal aid).
Other remedies
Note that there may also be other ways of reducing or eliminating the overpayment which need to be considered prior, or in addition to, offsetting, including the following:
There may be grounds for appealing to a tribunal against a decision that there has been an overpayment where a claimant disputes that s/he was a single person or a member of a couple at the relevant time. There are often disputes about whether and when married couples or civil partners were permanently separated, or whether and when two people were living together as if they were husband and wife or civil partners. Such disputes can be pursued to a tribunal by appealing against the ‘entitlement decision’ relating to the overpayment.
There may also be a dispute about whether a claimant made the required notification about becoming single or part of a couple. Such disputes can be pursued via the procedure set out in the Revenue’s Code of Practice (COP26) on overpayments. It should be borne in mind that valid notification can be made to any Revenue or DWP office.10 Regs 22(2) and 2 Tax Credits (Claims and Notifications) Regulations 2002. Please note that from 6/4/09 regulation 2 has been amended by SI No.697 of 2009. It is no longer clear what it means and we have written to HMRC to ask for clarification.It is common for claimants to notify the DWP but not the Revenue that a partner has left or joined them. Such disclosure is sufficient to satisfy the regulations. Where the claimant has notified the DWP, s/he should include details in the letters requesting offsetting (see above), in addition to any request for waiving recovery using the COP26 procedure.
A request can be made for waiving recovery on the grounds of hardship by writing to the Revenue with details of the client’s circumstances.
A new claim for tax credits on the basis of being a single claimant or couple can be backdated for up to three months, reducing or eliminating a previous overpayment.
Policy issues
CPAG has written to the Government suggesting that the Revenue’s current policy is unlawful and should be replaced by new guidance or regulations providing for the offsetting of underlying entitlement. The response from the Financial Secretary to the Treasury 11 Letter to CPAG from Stephen Timms MP dated 23 July 2009indicates an unwillingness to ‘….routinely offer notional entitlement …. in cases where there has been no genuine error on the part of the customer…’ as this could ‘…cut across the strong message about keeping claims up to date…’. There is, however, a recognition that existing policy can create ‘hard cases’ and the Government is proposing a working group to look at this in more detail. In the meantime, advisers could also consider raising the issue with and / or referring difficult cases to local MPs (who have access to a special tax credits hotline).
The recovery of ‘technical overpayments’ by the Revenue without offsetting underlying entitlement is an ongoing problem, which the Government appears currently unwilling to substantively amend. There are various remedies which should be considered by claimants including threatening judicial review. CPAG is interested in hearing advisers’ experiences relating to this issue, particularly where they have used the standard letters on our website. We are also looking to pursuing a judicial review in a suitable ‘test case’.
Thanks to Zoe Leventhal, formerly of Landmark Chambers, for her help and advice on this issue.
We would also like to acknowledge the contributions of the Low Income Tax Reform Group and of Citizens’ Advice, who have been actively involved in lobbying on this issue.
Please be aware that welfare rights law and guidance change frequently. Therefore older Bulletin articles may be out of date. Use keywords or the search function to find more recent material on this topic.
1      Reg 21(2)(a) Tax Credits (Claims and Notifications) Regulations 2002  »
2      Sec 3(4) Tax Credits Act 2002; CSTC/724/06  »
3      Sec 28 Tax Credits Act »
4      Reg 104 HB Regulations 2006 »
5      Sec 38 Tax Credits Act  »
6      Sec 28(1) Tax Credits Act »
7      Paras CCM 15510+ Claimant Compliance Manual »
8      Paras CCM15605+ Claimant Compliance Manual »
9      South-West Wing, Bush House, Strand, London, WC2B 4RD »
10      Regs 22(2) and 2 Tax Credits (Claims and Notifications) Regulations 2002. Please note that from 6/4/09 regulation 2 has been amended by SI No.697 of 2009. It is no longer clear what it means and we have written to HMRC to ask for clarification. »
11      Letter to CPAG from Stephen Timms MP dated 23 July 2009 »