Tax credits

Changes ahead in overpayment recovery

Law Centre (NI) director Les Allamby examines developments in the campaign to improve the administration of tax credits, particularly overpayments, and expresses cautious optimism that more changes may come.

The campaign for changes to the way tax credit overpayments are recovered and the introduction of more claimant friendly procedures continues to gather pace. During the first year of tax credits, one in three awards led to an overpayment and in total £1.9 billion was overpaid across the United Kingdom. No figures are published for overpayments in Northern Ireland. In 2005, critical reports on the administration of tax credits and overpayments were published by adviceni, Citizen Advice, the Parliamentary Ombudsman, the Adjudicator of Inland Revenue complaints and the House of Commons Committee of Public Accounts.

In response, the Chancellor announced changes to tax credits in his pre-budget report in December 2005. In particular, the limit on the amount that family income can rise over the current tax year without affecting tax credit entitlement will move from £2,500 to £25,000. This change will apply from April 2006 and have an impact when adjustments are due to be made to awards after the 2006/2007 tax year. From November 2006, the range of changes which must be reported to HM Revenue & Customs will be expanded to include changes in work status and the number of children for which the family can claim support. In addition, from that time, automatic limits will be imposed on the extent to which tax credits payments can be reduced in order to recover higher payments made in the earlier part of the year that are likely to cause an overpayment when the final tax year review is undertaken.

Following up on this announcement, Paymaster General Dawn Primarolo set out that she expected the value of overpayments to drop by one third once the new arrangements were fully implemented.

Since then, the Treasury Select Committee has taken evidence from a wide range of sources including Citizens Advice and adviceni and published an investigation into the pre-budget report. The Select Committee welcomed the changes to reform the tax credit system, although it questioned how the Revenue had calculated the proposed reduction in the value of overpayments.

The latest salvo has come from the Public Administration Select Committee in Tax Credits: Putting Things Right. Among its conclusions, the report expressed concern that the Revenue did not appear to have assessed the needs of vulnerable individuals who require regular and reliable payments as a budgeting necessity. The report also welcomed the Revenue’s willingness to introduce a pause before recovering overpayments and to review the test of reasonableness applied in the Revenue’s code of practice on recovery of overpayments.

Giving evidence to the Treasury Select sub-committee, the Paymaster General detailed further refinements to the existing reforms, including extending the offer of additional payments to those facing hardship where tax credit payments are reduced due to an increase in income above the £2,500 limit.

Stepping back, it is clear that claimants and the Revenue are not out of the woods yet. The final review and assessment of awards made during this tax year will undoubtedly generate a substantial number of new overpayments later in 2006. Getting a written breakdown of how an overpayment has arisen remains difficult. The lack of a right of appeal against the decision to recover a tax credit overpayment continues to raise issues of equality. For social security benefits (including tax credits predecessor Working Families Tax Credit) a recovery of overpayment can normally only happen where there has been a failure to disclose or a misrepresentation of a material fact. Whether the Revenue will be able to continue to resist the demand for a similar right in tax credits will be an interesting issue to follow this year.

© Law Centre (NI) 2006