New policy on recovery of tax credit overpayments

Patricia Carty, social security adviser at Law Centre (NI), reviews the new code of practice on recovery of tax credit overpayments and hopes that it will be helpful in improving the number and success of appeals.

The tax credit system has come in for heavy and far-reaching criticism in recent months. The Commons Public Accounts Committee reported on 5 February 2008 that more than £1 billion is still being lost each year in fraud and error and that there is little evidence that Her Majesty’s Revenue and Customs (the Revenue) has brought the scheme under control.

This report comes hot on the heels of the second report of the Parliamentary Ombudsman Ann Abraham, Tax Credits: getting it wrong? which was issued in October 2007. The report refers back to its 2005 predecessor, Tax credits: putting things right and restates the Ombudsman’s fundamental concerns about whether the complex annualised system can ever meet the needs of low income families and earners. She reports that there is still a genuine confusion about how the system works, that the Revenue’s complaints handling is still poor and that discussions about the code of practice on recovery of overpayments revealed a divergence of understanding about its proper application between the Revenue, the Adjudicator’s office and the Ombudsman’s office. Advisers and claimants can take some comfort from the fact that it appears that no one finds the system easy to understand.

The Ombudsman also voiced particular concern about the treatment of claimants who make a claim in the wrong status eg as a couple rather than as a single person. In such cases, large overpayments can arise when the claimant might well have been entitled to an equivalent or greater amount if s/he had claimed in the right status. The Ombudsman describes the recovery of such ‘technical overpayments’ as defying common sense and at odds with the basic objectives of the tax credits. This is indeed music to the ears of advisers who have been disputing and appealing such decisions with difficulty for years.

The Ombudsman acknowledged that the new COP 26 which is considered below should lead to a fairer system but felt that the reforms would not be enough to deal with all of the problems and also recommended further guidance and training and review of staff involved in these cases.

The new code of practice

On 31 January 2008, the Revenue issued its revised code of practice, Code of Practice 26 – What happens if we have paid you too much tax credit? to a muted welcome.

The new code of practice aims to be simpler and more user friendly. It is easier to read and to understand than its predecessor. It begins with a brief explanation of the annualised system and the most common causes of overpayments. It then sets out in black and white the responsibilities of the Revenue and of claimants. The responsibilities of the Revenue are that:

• when contacted it will give the correct advice on the information given to it;
• it will accurately record and use information given to it to pay the correct amount of tax credits;
• when notified that an award notice contains an error it will correct and reissue the notice;
• 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:

• they will give accurate, complete and up to date information when making or renewing claims;
• they will report changes of circumstances throughout the year and within one month of the changes occurring;
• they will check award notices and let the Revenue 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;
• they should check that any tax credit payments received match the amount on the award notice and let the Revenue know if there are differences.

The Revenue then sets out what will happen if it, the claimant or both fail in observing responsibilities.

If the claimant has fulfilled all her/his responsibilities but the Revenue has failed in its own responsibilities then the claimant will not be asked to repay all of the overpayment caused by its failure. The Revenue gives the following example, if a person tells the Revenue about a change of circumstances on 1 September and the Revenue does not amend the award until 16 October it will not collect back any overpayment that arises after 30 September. The Revenue will allow itself 30 days to act on reported information and will recover any overpayment that arises in that 30 day period.

If the claimant has not fulfilled her/his responsibilities and the Revenue has fulfilled its own, the Revenue will generally ask for repayment of the overpayment. For example, if there is a delay of more than one month in contacting the Revenue 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.

If both the Revenue and the claimant have failed in their responsibilities then the Revenue will look at all the circumstances of the case and may write off parts 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:

• dispute the overpayment in writing or by completing form TC846. This is a request for the Revenue to look at its decision again. Recovery will be suspended until the disputes process is resolved. The code explains that the Revenue will consider whether each party met its responsibilities, will check amounts and will issue a detailed decision;
• appeal any decision about entitlement to an independent tribunal. The Revenue unhelpfully states that it is possible to appeal where a claimant is unhappy about the amount of the overpayment and not the decision to recover. Advisers will be aware that appeals are in fact about issues of entitlement eg whether the Revenue was correct on the facts and law to decide that a person should have claimed as a couple rather than as a single person.

Recovery of overpayments

The Code sets out clear guidelines for how overpayments should be repaid.

Where tax credit payments are being made to a household that has received an overpayment, the Revenue will automatically reduce the amount paid to recover the overpayment at the following rates:

Tax Credit Award	Maximum recovery rate
Maximum tax credit award with no reduction for income	10%
An award of the family element of Child Tax Credit only	100%
All other awards	25%

Where a person is no longer in receipt of a tax credit award, the Revenue will ask for direct payments to recover the overpayment. This will happen even if the person is receiving another tax credit award as part of a new household.

The Revenue still has discretion to reduce repayment rates or write off overpayments where a person cannot meet her/his essential living expenses or there are exceptional circumstances.

Conclusion

As the Annual Review process gets ready to kick off in April, advisers should familiarise themselves with the new code of practice and get ready to use it to help sort out the disputes about overpayments which arise annually.

I found the new Code of Practice refreshingly easy to read and understand. The Revenue’s recording of calls and letters will be put under scrutiny in the new system and, as it has been beset by problems in the past. Therefore, a close eye should be kept on it by advisers.

I would also urge claimants and advisers to consider whether there are issues behind the cause of the overpayment which can be appealed to a tribunal before accepting the fact of the overpayment and going through the disputes procedure. There have been very few tax credit appeals and, as the system is so complex and decision making has been so problematic, one can only speculate that appealable points have not been taken forward to tribunal level.

For further advice on tax credits please contact the Law Centre's social security advice line which operates Monday to Friday, 9.30am to 1pm, Belfast 9024 4401 or Derry 7126 2433.