Tax credits: return of the living debt
Mark Willis looks at recovery of tax credits overpayments from universal credit.
Introduction
Reports are coming in of long-dormant tax credit overpayments being transferred to the DWP to recover the debt from ongoing payments of universal credit (UC). Claimants have found it difficult to get information about what has happened, as HM Revenue and Customs (HMRC) has washed its hands of the debt, while the DWP says it holds no details and is just acting on HMRC instructions. Introduced in 2002, the tax credits system was instrumental in reducing child poverty at a national level, but was plagued by administrative problems and overpayments. As tax credits are being replaced by UC, outstanding overpayments (approximately £1 billion a year) were never going to stay buried.
Legislation
Although suspended during the pandemic, HMRC has recently resumed the process of transferring over £5 billion of old tax credit debt to the DWP. The law allows for an overpayment of tax credits to be treated as an amount recoverable under section 71ZB of the Social Security Administration Act in any case, or specifically as an overpayment of UC in cases of in-year finalisation.1s28(1)(b) Tax Credits Act 2002, and as amended by reg 12 Universal Credit (Transitional Provisions) Regulations 2014
In either case, this transfer to the DWP to recover the overpayment by deduction from benefit, earnings or by court action must be notified to the claimant by HMRC.2s29(2) and (4) Tax Credits Act 2002 In practice, if a claimant has moved to UC, the notice is given on a TC1131 letter, which sets out the outstanding overpayments for previous tax years.3Sample TC1131 letter, available at gov.uk/government/publications/tax-credits-debt-in-universal-credit The government has stated: ‘Debts are only transferred when they are not subject to ongoing disputes or appeals.’4Treasury Minutes: government response to the Committee of Public Accounts on the Twelfth to the Nineteenth reports from Session 2017-19 in March 2018, Cm9596, March 2018, p12, available at parliament.uk
Mandatory reconsideration
HMRC allows the claimant an opportunity to request a mandatory reconsideration of the decision giving rise to the overpayment, or to dispute recovery, when an overpayment is notified. At least 30 days later, the notification of transfer of debt to the DWP to recover will be issued and, at least one week later, recovery from UC may begin. But the law allows a late mandatory reconsideration to be requested up to 13 months after the decision, with good reasons, and HMRC guidance allows three months to dispute recovery, or later in exceptional circumstances.
Under HMRC guidance (COP26), recovery is only put on hold pending mandatory reconsideration and appeal, not a dispute about recovery. HMRC has confirmed that if there is a successful mandatory reconsideration, appeal or dispute after the transfer, it can revise or cancel the amount that the DWP holds.5Tax Credits Consultation Forum Minutes, 8 July 2021 There is no right of appeal against the decision to transfer a debt to the DWP.
Deduction from UC
The rules on recovery by deduction from UC put tax credit overpayments twelfth in the priority list if it is a result of fraud, or fourteenth in other cases.6Sch 6(5)(2(l) or (n) Universal Credit, Personal Independence Payment, Jobseeker’s Allowance and Employment and Support Allowance (Claims and Payments) Regulations 2013 Due to this priority order, deductions may be made from UC to repay other higher priorities before tax credits, which may explain why the deduction for tax credits seems to appear out of the blue, only after other debts have been cleared. Rules provide that the maximum amount to be deducted for a tax credit overpayment is 15 per cent of the personal allowance, or 25 per cent if the claimant has some earned income, or 30 per cent if found guilty of an offence – although the maximum is now 25 per cent in practice for total deductions. Negotiation about the level of recovery, remaining balance and the possibility of a suspension of recovery or waiver on hardship grounds must be with DWP Debt Management – because it is treated as an overpayment of UC, the DWP has discretion under its guidance.7DWP, Tax Credits Debt in Universal Credit, and Ch 8 ‘Write off and waiver’, Benefit Overpayment and Recovery Guide, both available at gov.uk
Remission and write-off
Overpayments may have arisen several years ago in some cases, but HMRC cannot guarantee providing an explanation after the transfer has happened. An explanation should be requested at the time the overpayment is notified, in a final decision or notice to pay. HMRC also says that claimants should have received a notification of any outstanding overpayment at least once every calendar year.8Tax Credits Consultation Forum Minutes, 8 July 2021
There is no limitation on how old an overpayment may be for transfer to the DWP and deductions to begin. HMRC has previously written off or remitted substantial amounts of tax credit overpayments in bulk exercises (£1.6 billion in 2011/12, and an average of £165 million a year since then).9gov.uk/government/collections/hmrcs-annual-report-and-accounts Prior to 2016, these terms seem to have been used interchangeably, but it was then clarified:
Remission is the process used to identify and separate money owed to HMRC which we have decided not to pursue, for example, on the grounds of value for money. Write-offs is the term used to describe money owed to HMRC that is considered to be irrecoverable, for example, because there is no practical means for pursuing it.10HMRC, Annual Report and Accounts 2015-16, p150
It appears that a remission may be cancelled and pursued again if there is a change in the claimant’s circumstances, although a memorandum of understanding between the DWP and HMRC dated 2014 excluded remitted debt from the transfer process.11HMRC, Tax Credits Manual, TCM1000627 If a debt was written off by HMRC, the claimant should have been notified of this and it should not be revived and transferred to the DWP.12Tax Credits Consultation Forum Minutes, 8 July 2021
What can be done?
Claimants who are unhappy about a deduction from UC for a tax credits overpayment can be advised to take the following steps.
Request a mandatory reconsideration of the decision giving rise to the overpayment on form WTC/AP, if it is within 13 months of months of the outcome of the mandatory reconsideration, with good reason for a late appeal.
Request that recovery be suspended (ask HMRC to direct the DWP to pause recovery) pending mandatory reconsideration or appeal, in line with HMRC Code of Practice COP26, p1.
Dispute recovery of overpayment on form TC846, on grounds that overpayment was caused by an HMRC failure or error, within three months or later in exceptional circumstances.
Make a subject access request under data protection if the claimant believes the overpayment was previously written off, or s/he did not receive previous notifications of overpayment.
Contact the DWP Debt Management contact centre (0800 916 0647) about the level of deduction and current hardship.
Complain, involve your MP, and consider judicial review, if there is no response to the above.
 
1     s28(1)(b) Tax Credits Act 2002, and as amended by reg 12 Universal Credit (Transitional Provisions) Regulations 2014 »
2     s29(2) and (4) Tax Credits Act 2002 »
3     Sample TC1131 letter, available at gov.uk/government/publications/tax-credits-debt-in-universal-credit »
4     Treasury Minutes: government response to the Committee of Public Accounts on the Twelfth to the Nineteenth reports from Session 2017-19 in March 2018, Cm9596, March 2018, p12, available at parliament.uk »
5     Tax Credits Consultation Forum Minutes, 8 July 2021 »
6     Sch 6(5)(2(l) or (n) Universal Credit, Personal Independence Payment, Jobseeker’s Allowance and Employment and Support Allowance (Claims and Payments) Regulations 2013 »
7     DWP, Tax Credits Debt in Universal Credit, and Ch 8 ‘Write off and waiver’, Benefit Overpayment and Recovery Guide, both available at gov.uk »
8     Tax Credits Consultation Forum Minutes, 8 July 2021 »
10     HMRC, Annual Report and Accounts 2015-16, p150  »
11     HMRC, Tax Credits Manual, TCM1000627 »
12     Tax Credits Consultation Forum Minutes, 8 July 2021 »