Social security update

Tax credits - recovery of overpayments

Social security advisers Jacqui Loughrey and Lee Hatton look at Her Majesty’s Revenue and Customs policy on recovery of overpayments as set out in the Department’s new code of practice.

Anyone either claiming or dealing with enquiries relating to Working Tax Credit (WTC) or Child Tax Credit (CTC) will be aware that they are assessed on an annual basis. An overpayment can arise when a person’s tax credit award is finalised at the end of the tax year. This can happen for a variety of reasons including, for example, an error made by Her Majesty’s Revenue and Customs (HMRC) when dealing with a claim or by a claimant inadvertently (or otherwise) failing to give all or inaccurate details of personal or financial circumstances. Regardless of the underlying cause, recovery of overpayments continues to be a major issue for advisers and claimants alike.

While it is not the only vehicle for resolution, HMRC policy, in the Code of Practice, sets out a useful framework of the rules for determining when and how such overpayments are recoverable.

Taking account of changes to the policy which were implemented in April 2006, this article focuses on the Code of Practice and summarises its main features in relation to how an overpayment will be recovered and when an overpayment can be written off or will not be recovered. The factors which will be taken into account when deciding not to recover are outlined, as is how in-year overpayments will be recovered. Finally, we look at what a claimant can do to reduce the risk of hardship should an overpayment arise.

The Code of Practice

HMRC's Code of Practice COP26 ‘What happens if we have paid you too much tax credit?’ on overpayments and recovery was updated in April 2006.

The Code of Practice (the code) provides that overpayments will normally be recovered. The ways of recovering an overpayment are identified, namely:

	automatic recovery from a tax credit award providing the claimant is in the same household in which the overpayment arose;
	making a payment direct to HMRC. This option will be applied where a person is no longer entitled to tax credits or an award has ended due to a change in the composition of the household.

Of the two options, HMRC will normally prefer recovery through adjusting the level of payment on a future award of tax credits.

Following a change of policy in October 2005, where a claimant disputes the overpayment by sending in form TC846, recovery of the overpayment is no longer automatic and any recovery will be suspended until HMRC has investigated the matter and reached a decision.

A notice to make direct payments will normally give a person 30 days to pay back the overpayment. However, if a person is facing hardship then HMRC will seek further details and may offer a longer period up to twelve months.

Regulation 12A of the Tax Credits (Payment by the Board) regulations 2002 sets out that any reduction on a future award will be subject to the following maximum amounts:

	ten per cent for claimants receiving the maximum award;
	100 per cent for claimants receiving only the family element of CTC;
	25 per cent claimants entitled to CTC above the family element or WTC below the maximum award.

As a couple normally make a tax credit claim jointly, HMRC can seek to recover any overpayment against either member of the couple who are jointly liable for the overpayment.
Where a relationship has broken down, HMRC will look at all the circumstances of the case including the income and expenses of each partner and then decide how to recover the money owed. This can entail recovering all the money from one ex-partner or a proportion from each person.

Writing off an overpayment

The code sets out two circumstances in which all or part of the overpayment will be written off. These are where the overpayment:

	resulted from a mistake made by HMRC or another government department and the claimant could not reasonably have known the award was incorrect; or
	will cause hardship to the claimant or her/his family if recovery is initiated. HMRC may also accept payment over a longer period of time in a case of this kind. Each case will be treated on its own merits.

In order for an overpayment to be written off, a claimant needs to dispute the overpayment and ask for it to be reconsidered. This can be done through form TC846 which is available on request from HMRC. Any recovery of the overpayment will be suspended while HMRC reconsiders its decision.

Non-recovery: mistakes

Examples given in the code where mistakes will not lead to recovery include where a helpline adviser or a letter wrongly says an award is correct even though a person has contacted HMRC to say the award notice is wrong or to question how entitlement is worked out or tells HMRC about an unexplained change to payments.

The code also says that a claimant should check the details on any award notice including whether the award is for an individual claimant or a couple, the hours worked, whether the claimant is getting Income Support, Income-based Jobseeker’s Allowance or Pension Credit, whether anyone in the household has a disability to qualify for the disability element, the number and age of any children in the household, childcare costs and total household income for the period shown on the award notice.

A person is also expected to check bank statements to ensure payments match the details on the award notice. A person is expected to contact HMRC about incorrect information on the day the notice was received. A person is also expected to notify HMRC about any changes of circumstances. HMRC will look at any reasons as to why a person failed to check the details on an award. A person is expected to check an award unless there are exceptional circumstances, for example a bereavement of a close relative or a person was in hospital.

Non-recovery: hardship

All the facts and circumstances of a case will be taken into account before a decision to write off all or part of an overpayment. The current code does not set out what circumstances will be taken into account. However, based on practical experience and the previous code, the following factors are likely to be taken into account:

	current and future income plus essential living expenses;
	savings, investments and other assets which could be used in the short or medium term to make payments. In this case, recovery may be temporarily delayed rather than the overpayment written off;
	other liabilities for example, repayments on a mortgage, rent including any arrears, overpayments of other social security payments or other debts;
	other payments due to HMRC and how recovery of tax credits will affect this;
	the length of time it will take to recover the overpayment;
	previous payment history with HMRC;
	whether paying what is owed will result in the claimant not being able to afford essential services such as heating either immediately or over a period of time;
	whether there is at least one child under five or a chronically ill or disabled person in the family whose health could be affected by the recovery of the overpayment, even over an extended period;
	any other relevant factors.

In-year recovery and additional payments

Where a tax credit overpayment is discovered during the year, the award will be adjusted to reduce entitlement and recover all or part of the overpayment by the end of the financial year. Automatic limits are imposed on the extent to which tax credit payments can be reduced to recover higher payments in the earlier part of the year which could lead to an overpayment for the year as a whole. These limits are the same as for recovery of end of year overpayments:

ten per cent for claimants receiving the maximum award;

100 per cent for claimants receiving only the family element of CTC;

25 per cent for claimants entitled to CTC above the family element or WTC below the maximum award.

The recovery of an overpayment by deducting from the current year’s award can lead to hardship for some claimants. The new limits to be imposed will prevent an award being reduced to nil (except for claimants receiving only the family element of CTC). However, if the reduction in the award does cause hardship, claimants can ask HMRC to make additional payments. These will bring the award back nearer to the level they would have been at had the award not been adjusted.

From February 2006, these additional payments are now available to claimants whose award has been adjusted because they have reported a rise in income of more than £2,500 whereas previously additional payments were not available to claimants in this situation.

If additional payments are made, when the award for the year is finalised, HMRC will say there is an overpayment and will expect to recover it from the award for the following year.

The Code of Practice is available at www.hmrc.gov.uk.

© Law Centre (NI) July 2006