Dealing with overpayments

As predicted, the sting of tax credit overpayments is beginning to be felt by clients of advice agencies. Rose Logue and Lee Hatton examine options available to claimants and advisers.

The Tax Credits system, introduced in April 2003, was a major change in the administration of benefits, seen as a step forward in the government’s long term aim of reducing poverty. Consisting of two means tested elements, Working Tax Credit for people working and on a low income, and Child Tax Credit for those who have responsibility for a child, the new system promised much. And for many low income families it has delivered on that potential. However, with an overly complicated system and a first year rife with problems, a substantial amount of claimants are now experiencing the adverse impact of these difficulties. As advisers, we see the increasing amount of overpayments as the achilles’ heel of the new regime of tax credits.

How overpayments arise

If a claimant (and partner in the case of a joint claim) is paid more tax credit than s/he is entitled to, any amount over and above her/his entitlement is considered an overpayment, and can be recovered in part or whole by the Inland Revenue. Broadly speaking, overpayments of tax credits may be discovered either during the current year of claim (in-year overpayments) or at the end of or after the current tax year (end of year overpayments).

In-year overpayments

Entitlement to tax credit depends on family circumstances, childcare charges and income. An overpayment may have been discovered during the year as a result of a claimant notifying a change in any of these to the Inland Revenue. An overpayment may also have arisen due to an error made by the Inland Revenue in dealing with the claim or by the claimant failing to provide correct or complete information.

End of year overpayments

Awards of tax credit are based, among other things, on an annual assessment of income. Income for the current year of claim is estimated by an assessment usually based on the previous tax year, although there are exceptions. Therefore, decisions and awards are provisional pending a final decision made at the end of or after the current tax year through an annual review process. The final decision is based on the actual income figure for the relevant tax year. This process provides for an end of year reconciliation based on actual income before a final decision on entitlement is made. Income increases of less than £2,500 are ignored. The final decision establishes whether the initial decision was correct or incorrect and any associated overpayment or under-payment. It is at precisely this point that the potential for the discovery of overpayments is high.

The Tax Credits Act 2002

In the case of an overpayment, the Inland Revenue must by law (Section 29 of the Act) provide written notice confirming it and state the amount and method of recovery. Any related change in entitlement to tax credit must also be notified in writing. There is no right of appeal to an appeal tribunal against a decision by the Inland Revenue to recover an overpayment (Section 38(1)). However decisions on entitlement can be appealed to an appeal tribunal within 30 days of the date of the written notice of decision. Sections 28 and 29 of the Tax Credits Act 2002 provide powers for dealing with potential in-year overpayments by way of adjustment of the current award and for dealing with end of year overpayments by recovery from future awards of tax credits or other options.

Code of Practice COP26

The Inland Revenue Code of Practice COP26 (revised version) ‘What happens if we have paid you too much tax credit?’ (see www.inlandrevenue.gov.uk) provides further details on the recovery of overpayments. The Code of Practice (the code) provides that in-year overpayments during the tax year 2004/5 can be recovered by adjusting the existing award to recover all or part of the overpayment by the end of the tax year. Where the former causes hardship, the claimant should contact the Inland Revenue as additional payments of tax credit can be made in some circumstances.

The preferred method is through deductions from the award for the following year. The code also provides for recovery via direct payment within 30 days or twelve monthly installments for overpayments arising for the tax years 2003/4 and 2004/5.

Regulation 12A [Tax Credits (Payment by the Board) Regulations] lays down maximum amounts that can be recovered from future awards (10% if receiving maximum award, 100% if in only receipt of family element of Child Tax Credit, 25% in other cases).
As couples must make a joint claim, both partners are jointly liable for the overpayment unless otherwise stated in writing by the Inland Revenue. In the case of relationship breakdown, the Revenue will examine the circumstances, income and expenses of each of the former partners in reaching a decision on recovery. The overpayment may be recovered from one former partner only or from both former partners in different or equal amounts.

Non recovery

According to the code, overpayments can be written off where:

• the overpayment resulted from a mistake made by the Inland Revenue and the claimant could reasonably have thought the award was correct; or
• recovery will cause hardship to the claimant or her/his family. The Inland Revenue may also consider recovery over a longer period of time in a case of this kind.

Examples given of mistakes that will not lead to recovery include where the Inland Revenue advises an employer to pay the wrong amount of tax credit or information relating to a change in circumstances has not been acted upon within 30 working days. However, as advisers, we have noted that what may appear to us to be a mistake by the Inland Revenue will not always be accepted as such.

A failure to issue an award notice, (issue of which is a statutory requirement under Section 23(1) of the Tax Credits Act 2002) would not appear to be accepted by the Inland Revenue as their mistake. Equally, incorrect inputting of the original information on the claim form (for example, an annual income is stated on the claim form as £13,000, but is inputted into the Inland Revenue computer as £1,300) and again no award notification is issued, would also appear to not be treated as a mistake by the Inland Revenue. Instead, the Revenue’s approach is that it is down to the claimant to contact the Tax Credits Office to find out why an award notification has not been issued. This places a particularly heavy burden on claimants, especially in the first year of operation of a new benefit, where no long standing knowledge of the system can be assumed. From our experience, it remains to be seen exactly what will constitute a mistake by the Inland Revenue that may allow remittal of or a reduction in the amount to be recovered from overpayment. In cases where recovery will cause hardship, the code states that the Inland Revenue will look at all the circumstances of the case in deciding whether to write off all or part of the overpayment or to allow more time to pay. In considering the question of hardship, a number of factors will be taken into account (see Law Centre (NI) tax credit briefings for a complete list).

The overpayment process

Below is a brief overview of the process that occurs once a claimant is informed that s/he may have been overpaid.

1. Final award notice is received by the claimant with an overpayment notification.

2. The claimant should contact the Helpline/Inland Revenue Enquiry Centre for explanation of the overpayment.

3(a). If the reason for the overpayment can be identified and the claimant is unsatisfied a proforma (which gives claimants opportunity to outline why they think the decision to recover tax credits is wrong) and a copy of the code are issued.

3(b). If the reason is not identified, a query is referred to the overpayment team for further explanation.

4. The overpayment team issues a further explanation, a copy of the pro-forma and a copy of the code to the claimant.

5. If the claimant wishes the over-payment to be remitted, s/he puts request in writing (using the proforma) to the overpayment team.

6. The overpayment team decides if all or part of the overpayment can be remitted and issues decision and payment to the claimant. An unsatisfactory decision can be reconsidered upon written request from the claimant.

7. If the claimant is still unhappy with the new decision, s/he can make a complaint via the complaints team.

Other options

An adviser unable to obtain a satisfactory outcome through the code of practice may lodge a complaint with the Inland Revenue, apply to the adjudicator, apply to the High Court for judicial review of the decision or, in the case of maladministration, complain to the Office of the Parliamentary Commissioner for Administration. As overpayments of tax credits become an increasingly large part of the adviser’s workload, the code of practice is an invaluable tool in assisting claimants. In light of the lack of a right of appeal against an overpayment decision in the primary legislation, the code becomes the main route to challenging an overpayment decision. It should find a prominent place on the desks of all advisers, and become the first port of call for those advising on overpayments of tax credits.

All in all, the new tax credits have provided a welcomed boost to the incomes of many families, and their beneficial impact should not be forgotten amongst the difficulties faced in this first year of operation.

For a copy of the Law Centre's tax credit briefings contact the Publications Department.