Tax Credit Briefing 2

Recovery of overpayments

Introduction

The recovery of overpayments is a major issue for advisers and claimants alike. This briefing covers the law on overpayments and arrangements for recovery, Her Majesty’s Revenue and Customs (HMRC) policy on when and how such overpayments can be recovered, details of how an overpayment can be challenged or written off and useful tips for advisers in getting redress elsewhere.

Throughout the document, the term claimant refers to an individual claimant if the application is made by a single person or lone parent or to both partners in a couple as couples need to make joint claims for tax credits. Year refers to a tax year, ie 6 April to 5 April.

1. Background

Decisions and awards made on claims for tax credits are provisional and will be subject to final decisions made through an annual review process after the end of the tax year (for further details see Briefing 1 Annual Review and Renewal).

1.1 Decision making process

The decision making process for tax credits in summary is as follows.

n  An initial decision on a claim is made under Section 14 of the Tax Credits Act 2002 (the Act). This then leads to a notice of a decision being given under Section 23 of the Act.  The award notice does not include a breakdown of how the award has been calculated.

n  At the end of the year, a final notice of the decision is given under Section 17 of the Act.  This notice will include a breakdown of how the award has been calculated.  The claimant is required to check the personal circumstances contained in the final notice and provide details of actual or estimated income for the tax year.  This information is used to finalise tax credit entitlement for the year.

Where a claimant’s entitlement is less than the amount of tax credit actually paid, there will be an overpayment. 

1.2 Causes of overpayments

An overpayment may arise where a claimant has not given HMRC correct information at the time of claim or has failed to let HMRC know before the annual review that there have been changes to her/ his circumstances.  Overpayments also arise because HMRC has made a mistake in recording correct information.  It is important for claimants to carefully check award notices.  This is because if a mistake is recorded on an award notice, the claimant has the responsibility to notice this and to let HMRC know that there has been a mistake. 

The following changes of circumstances must be notified to HMRC within one month of the change or the claimant’s knowledge of the change, whichever is later:

n  changes to the household.  If a person claims as a single person or as a member of a couple s/he must let HMRC know if s/he becomes a member of a couple or single or if either member of the couple leaves the UK permanently or for longer than set periods.  In these cases the claim will end and a new claim must be made;

n  for Child Tax Credit only, loss of right to reside;

n a decrease for four or more consecutive weeks of £10 per week or more in eligible childcare costs;

n  reductions in normal working hours below 30 or sixteen hours;

n  if a child leaves the household, dies or ceases to be eligible.

Failure to notify the above changes may lead to HMRC imposing a penalty on the claimant where tax credits are overpaid.

The following changes may be notified during the tax year or at annual renewal:

n  changes of income of more than £25 000 per year; 

n  increases in hours worked above sixteen and 30 hours limits;

n  increases in childcare costs of more than £10 per week for more than four weeks in a row;

n  a new baby or another child joins the family.

If the changes lead to an underpayment of tax credits, this can usually only be backdated for three months. It is therefore in a claimant’s interests to keep HMRC up to date.  If the changes lead to an overpayment, it may be recovered.

2. The law

Overpayments are dealt with in Sections 28 and 29 of the Act.  In particular, Section 28 provides powers for dealing with likely overpayments (ie, where it appears that if the existing in-year award continues it will lead to an overpayment).  In such cases, HMRC can amend the award to reduce or eliminate the possible overpayment.

Where an overpayment is identified after the end of the financial year, then it can be recovered from future awards of tax credits or in other ways. 

Section 29 sets out that HMRC must provide written notice to the claimant setting out the amount of the overpayment.

Section 38(1) of the Act lists the decisions which can be appealed and this does not include decisions made under Section 28 or Section 29.  As a result, there is no right of appeal to an appeal tribunal against a decision by HMRC to recover an overpayment.  Furthermore, unlike with social security benefits, there is no statutory test for when an overpayment is to be recovered.

Of course, if the actual overpayment is disputed, for example where a claimant believes HMRC has made a mistake about entitlement, then an appeal tribunal can deal with this issue.  For example, where HMRC has raised an overpayment because it has made a decision that a single claimant should have claimed as a member of a couple, an appeal can be lodged against the decision that the claimant was a member of a couple and if this succeeds there will be no overpayment.  In many cases, it will be necessary to get a full statement of reasons for the overpayment from HMRC in order to decide if there are grounds for appealing the decision. 

An appeal must be lodged within 30 days of the date on the written notice of a decision. 

3. HMRC policy: 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 January 2008.  It is available at www.hmrc.gov.uk.

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

n  automatic recovery from a tax credit award providing the claimant is in the same household in which the overpayment arose;

n  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. Where a claimant disputes the overpayment by sending in form TC846 (see section 4 below: Writing off an overpayment) 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:

n  ten per cent for claimants receiving the maximum award;

n  100 per cent for claimants receiving only the family element of Child Tax Credit;

n  25 per cent for claimants entitled to Child Tax Credit above the family element or Working Tax Credit 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 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.

4. 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:

n  resulted wholly or partly from the failure by HMRC to meet its responsibilities as set out in the code of practice; or

n  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-line or upon request from HMRC. Any recovery of the overpayment will be suspended while HMRC reconsiders its decision.

5. Non-recovery: mistakes

The code of practice sets out when HMRC will and will not recover overpayments.  It sets out clearly what it sees as its responsibilities and the responsibilities of claimants.  It gives guidance, set out below, on what will happen when either party has not met its responsibilities.

The responsibilities of HMRC are that:

n  when contacted it will give the correct advice on the information given to it;

n  it will accurately record and use information given to it to pay the correct amount of tax credits;

n  when notified that an award notice contains an error, it will correct and reissue the notice;

n  when it is told of a change of circumstances, it will accurately record what it was told and send a new award notice within 30 days of receiving all the information necessary.

The responsibilities of people claiming tax credits are that:

n  they will give accurate, complete and up to date information when making or renewing claims;

n  they will report changes of circumstances throughout the year and within one month of the changes occurring;

n  they will check award notices and let HMRC know if there are any errors in respect of the claim including family circumstances, hours of work, income, childcare costs and receipt of benefits.  This should be done within one month of receiving the award notice and claimants should record the date and manner of notification;

n  they should check that any tax credit payments received match the amount on the award notice and let HMRC know if there are differences.

The code of practice sets out what will happen if HMRC, the claimant or both do not meet these responsibilities:

n  if the claimant has fulfilled all its responsibilities but HMRC has failed in its responsibilities then the claimant will not be asked to repay all of the overpayment caused by its failure;

n  if the claimant has not fulfilled his/her responsibilities and HMRC has, HMRC will generally ask for repayment of the overpayment.  For example, if there is a delay of more than one month in contacting HMRC about an error in an award notice then the claimant may be asked to repay the amount overpaid until the date that contact was made;

n  if both HMRC and the claimant have failed in their responsibilities then HMRC will look at all the circumstances of the case and may write off part of the overpayment.

The code of practice then sets out how to challenge the recovery of an overpayment.

A claimant can ask for an explanation of an overpayment over the phone or in writing.

If the claimant does not agree that the overpayment should be recovered s/he can:

n  dispute the overpayment in writing or by completing form TC846.  This is a request for HMRC to look at its decision again.  Recovery will be suspended until the disputes process is resolved.  The code of practice explains that HMRC will consider whether each party met its responsibilities, will check amounts and will issue a detailed decision;

n  appeal any decision about entitlement to an independent tribunal.  

6. 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 code of practice says that an overpayment will only be written off due to financial hardship in exceptional circumstances.

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:

n  current and future income plus essential living expenses;

n  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;

n  other liabilities for example, repayments on a mortgage, rent including any arrears, overpayments of other social security payments or other debts;

n  other payments due to HMRC and how recovery of tax credits will affect this;

n  the length of time it will take to recover the overpayment;

n  previous payment history with HMRC;

n  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;

n  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;

n  any other relevant factors.

7. 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:

n  ten per cent for claimants receiving the maximum award;

n  100 per cent for claimants receiving only the family element of Child Tax Credit;

n  25 per cent for claimants entitled to Child Tax Credit above the family element or Working Tax Credit below the maximum award.

The recovery of an overpayment by deducting from the current year’s award can lead to hardship for some claimants. 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 if the award had not been adjusted.

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

8. Impact of overpayments on social security benefits

For Housing Benefit, if a claimant’s tax credits are reduced to recover an overpayment then Housing Benefit entitlement is based on that reduced amount.  However, any additional payments made by HMRC count as income.

Example

David and Siobhán are entitled to Child Tax Credit of £60 per week.  Following an overpayment, this has been adjusted to £40 a week with the difference going to pay off an overpayment.  David has lost his job and is now claiming Incapacity Benefit and Housing Benefit.  In calculating his income for Housing Benefit, only £40 will be taken into account (ie actual tax credit awarded minus the deduction for the overpayment).

For Income Support and Income-based Jobseeker’s Allowance, the rules are less clear.  A decision, CIS 1064/2004 suggests that, as for Housing Benefit, the amount of tax credit to be taken into consideration for Income Support is the amount actually paid after the deduction for recovery of the overpayment or the payment of additional payments.  

9. Dealing with advice agencies

HMRC will deal with advice agencies and other organisations if written authority is produced either on form TC64-8 or through a short signed letter.  Where a couple have jointly claimed then authorisation must be signed by both partners.  In the alternative, information may be given to an adviser where it is clear the claimant (both partners if a joint claiming couple) is with the adviser and consents to the disclosure of information.

10. Other redress

There is no right of appeal to an appeal tribunal against a decision to recover an overpayment (save where entitlement to tax credits is being disputed).  Where an adviser is unable to negotiate a satisfactory outcome through the code of practice, there are four other options.

First, a complaint can be made to HMRC.  A complaint can be made to the Tax credits Complaints Manager by:

n  calling the Helpline on Tel 0845 300 3900;

n  writing to: Complaints Manager, Tax Credit Office, PO Box 145, Preston, PR1 0SB; or

n  visiting any HMRC Enquiry Centre.

If the complaint is in writing a person should put ‘Complaint’ at the top of the letter, set out clearly the full name and address, national insurance number and telephone number or e-mail and give the full details of the complaint.

If a person is not happy with the response s/he may ask HMRC to consider it again at the Level 2 complaints stage.  A senior officer will look at the complaint again and give a final decision.

Second, if a person is still unhappy s/he may ask the Adjudicator to consider the complaint.  The adjudicator can deal with complaints about:

n  mistakes;

n  delays;

n  poor or misleading advice;

n  inappropriate staff behaviour;

n  the way discretion has been exercised;

n  how HMRC has dealt with requests under the Code of Practice on Access to Government Information.

For more information about the Adjudicator, see code of practice ‘Putting things right when we have made a mistake’ COP 1 and Adjudicator’s Office leaflet (AO1) available from HMRC offices.

Third, a legal challenge to a recovery could be made through judicial review, for example, on grounds that HMRC has exercised its discretion unlawfully or unreasonably.

Finally, if the way a tax credit claim has been handled gives rise to maladministration, a complaint can be made to the Office of the Parliamentary Commission for Administration. The Northern Ireland Ombudsman does not have jurisdiction to deal with complaints of HMRC maladministration. Normally, a claimant must have exhausted HMRC complaints procedures including the adjudicator process before the Ombudsman will deal with a complaint.  A complaint must be referred through an MP.  Complaints that may be considered include:

n  avoidable delays;

n  failure to follow correct procedures;

n  giving misleading or inadequate advice;

n  mistakes in handling claims;

n  discourtesy and failure to apologise properly and formally.

11. Useful addresses

HER MAJESTY’S REVENUE AND CUSTOMS             

Postal correspondence :  Tax Credit Office , Preston England PR1 0SB

Local enquiry centres   

Central telephone no:   0845 302 1481

Antrim:                        12-14 Castle Street , Antrim BT41 4JE

Ballymena:                  Kilpatrick House, 38-54 High Street , Ballymena BT43 6DR

Banbridge                    Bridgwater House, 25 Castlewellan Road, Banbridge T32 4AX

Belfast                        Beaufort House, 31 Wellington Place , Belfast BT1 6BH

Coleraine                     Fern House, 1A Adelaide Avenue , Coleraine BT52 1AJ

Craigavon                    Marlborough House, Central Way ,  Craigavon BT64 1AH

Enniskillen                   Abbey House, Head Street , Enniskillen BT74 7JL

Lisburn                        Moira House, 121 Hillsborough Road , Lisburn BT28 1LA

Derry                           Foyle House, Duncreggan Road ,  Londonderry BT48 0AA

Newry                         Downshire House, 22 Merchants Quay , Newry BT35 6HS

Telephone helpline:        0845 300 3900 and 0845 300 3909 (text phone)

Welfare rights workers

Priority helpline:          0845 300 3946

Website:                     www.hmrc.gov.uk

ADJUDICATOR

Adjudicator’s office    Haymarket House , 28 Haymarket , London SW1Y 4SP

Telephone:                020 7930 2292

Website:                   www.adjudicatorsoffice.gov.uk

OMBUDSMAN            

Office of the Parliamentary Commissioner for Administration, Millbank Tower, Millbank, London SW1 4QP

© Law Centre (NI) July 2008

Published with support from Her Majesty's Revenue and Customs

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