Tax Credits: Dealing with overpayment debt
This section of the site provides advisers with information about repaying tax credit debt. Before agreeing to repay, it is worth considering whether the overpayment can be challenged.
NOTE: As of April 2014, the HMRC intermediaries guide ‘How HMRC handle tax credits overpayments, has been taken offline for updating. We have continued to include the previous version on this page and will update it once the new HMRC guide is ready.
- Methods of recovery
- Direct recovery
- Recovery via PAYE tax code
- Ongoing recovery
- Financial hardship
- Dual recovery
- DWP and tax credit debt
- Special circumstances
As explained above, HMRC may recover overpayments under the TCA 2002, Section 29(3) to (5), in one of three ways:
- by deduction from any tax credit award made to the claimants (referred to as ‘ongoing’ recovery);
- by direct recovery; or
- through amending the PAYE tax code.
It should be noted that claimants do not have a choice between ‘ongoing’ and ‘direct’ recovery. The recovery method used is determined by the claimant’s claim circumstances.
If the claim on which the overpayment occurred is still in payment, ongoing recovery will be used by the Tax Credit Office. If that claim has ended, or if the claim is a ‘nil’ award (entitlement exists but no payments are due as income is too high) then HMRC will send the debt to their Debt Management and Banking arm for collection by direct recovery. This is the case even if a claim ends and then re-starts for some reason (e.g. a claimant splits with their partner, makes a single claim and gets back together making a new joint claim – the overpayment from the original joint claim cannot be recovered from the new joint claim). It is worth noting that HMRC announced in the Autumn 2012 statement that they would be introducing new IT to allow ‘cross claim’ recovery whereby overpayments on a claim that has ended can be recovered from a future new claim even if it is made in a different capacity (for example an overpayment from an old single claim will be recovered against a new claim as a couple). It is expected that this will commence in October 2014. See below for more detail about how this new cross claim recovery will work
HMRC have published a guide for intermediaries online which explains how HMRC handle tax credit overpayments, including their direct recovery policies.
Direct recovery cases are dealt with by Debt Management and Banking (DMB) which is a separate arm of HMRC to the Tax Credit Office (who deal with ongoing recovery issues). DMB collect tax debt as well as tax credit debt although the processes for each are different.
HMRC revised their guidance around tax credit direct recovery cases in 2010 in a policy that is much more understanding towards claimants and more generous than the previous guidance. That said, its success very much relies on its implementation by staff.
The following table gives an overview of the direct recovery process. Further detailed information can be found in the HMRC guide for intermediaries.
Notification of overpayment – TC610
When a claim ends, for whatever reason, and any overpayment is outstanding, the tax credit system will issue a TC610 notice to pay form once any appeal period has passed (normally 30 days).
The TC610 advises the claimant that the amount is owed to HMRC and normally gives 42 days to pay. It advises claimants that overpayments can be spread over 12 months but does not set out any longer payment options. It encourages claimants to contact the payment helpline on 0845 302 1429. The payment helpline is part of the contact centre directorate in HMRC.
A sample of the TC610 can be found on page 11 of the HMRC intermediaries guide.
Debt passed to Debt Management and Banking (DMB)
If no response is received to the TC610, and no dispute has been filed, the debt will be passed from the Tax Credit Office system to Debt Management and Banking’s IDMS system
Reminder letter sent by DMB
A reminder letter, IDMS 99 will be sent automatically.
A further reminder letter sent by DMB.
If no response is received to the TC610 or the previous reminder (IDMS 99), a further letter will be sent asking for payment.
Debt Management Telephone Centre (DMTC) will attempt telephone contact
DMTC will contact the claimant to discuss the overpayment and request payment.
If DMTC establish that the claimant cannot make a payment arrangement (based on the financial hardship criteria below) they will suspend collection for 12 months or consider remission.
See the HMRC intermediaries guide for further information.
If the claimant has refused to pay in full or no contact could be made by telephone, the Debt Technical Office (DTO) will review the case to ensure the overpayment is due and also to see if any of the special rules applying to household breakdowns or dual recovery applies (see below for further information).
If no contact can be made, it may be referred to a field officer for a visit. A payment arrangement can still be agreed at this stage.
If no contact can be made, or the claimant refuses to make a payment arrangement, HMRC will consider referring the debt to a private debt collection agency, coding out the debt through the person's tax code or using their distraint powers. They may also use the County Court, although distraint is their preferred approach.
The TC610 (see Step 1 in the table above) normally gives claimants 42 days to pay the amount stated. Often in tax credit cases the amount due can be several thousands and most claimants will not be able to pay it immediately.
The TC610 informs claimants that the debt can be repaid over 12 months, but does not set out any longer payment options. Even 12 months is not long enough for most tax credit claimants with substantial overpayments.
What claimants are not told at this point is that DMB have a time to pay system that allows repayments over much longer periods.
Previously, DMB staff were instructed to ask for income/expenditure details for time to pay arrangements that lasted more than three years. Guidance given to staff from March 2010 means that full income/expenditure details are no longer required, except if repayments will take longer than 10 years.
The following time to pay options are available:
HMRC should readily accept an offer to repay the debt in twelve monthly instalments. No additional questions should be necessary.
Over 12 months up to 10 years
Claimants can ask HMRC to repay over any period up to 10 years without providing full income and expenditure details. HMRC staff are instructed to follow the ‘Tax Credits Negotiating Framework’ in dealing with these requests. A copy of this is available in Section 5 of the HMRC intermediaries guidance.
Staff are encouraged to try and set up a direct debit arrangement for any time to pay agreements. Generally, repayments of less than £10 per month will not be accepted unless they will clear the debt in less than three years. If a claimant cannot afford £10 per month, then DMB should suspend recovery for twelve months and then review the situation at the end of that period. If the claimant is still unable to pay more than £10 per month following their twelve-monthly review, HMRC should consider writing off the debt on grounds of financial hardship. This new guidance does not affect time to pay arrangements already in place for less than £10 per month unless they stop for any reason.
10 years or more
DMB staff are instructed to get a full income/expenditure breakdown where claimants request time to pay agreements that will last longer than 10 years. This is most likely to be needed where the overpayment debt is large and the claimant has a low income. As with shorter arrangements, payments of less than £10 per month will not be accepted and HMRC should suspend the debt in those cases and review after twelve months.
If a claimant has agreed to repay over a period longer than 10 years, provided payments are made as agreed, HMRC will write off any debt remaining at the 10-year point.
A copy of the income/expenditure form used by HMRC can be found in the HMRC intermediaries guide. In assessing ability to repay, HMRC state that they will compare actual expenditure with figures produced by the Office of National Statistics and seek an explanation from the claimant where their figure is higher. This should not be done for expenditure that the claimant does not have any control over unless they appear excessive. This includes things like rent, mortgage, secured loans, council tax, court fines, pension payments, life assurance, HP or conditional sale, TV licence, maintenance and child support.
HMRC have the power to use charging orders against a claimant’s residence where a debt is owed. The current guidance states that this will not be considered in stand-alone tax credit debt cases but may be considered if there is another HMRC tax debt as well.
The final step in the direct recovery process involves HMRC commencing legal proceedings, normally in the county court, to obtain judgement for the debt.
Previously, HMRC’s preferred approach was to take claimants to the County Court and obtain a County Court Judgement (CCJ). However, in the last year HMRC have changed their approach and their preferred method of enforcement is distraint which involves the seizing of goods where HMRC believe the person has the means to repay but refuses.
It should still be possible to negotiate a time to pay arrangement right up until the very last stage of the recovery process, although it is advisable that claimants make some attempt to discuss their case with HMRC rather than ignore the demands. If the claimants thinks they should not have to repay, a dispute can be lodged, but it may be necessary to liaise with DMB to ensure they know what is happening and negotiate suspension of recovery directly with them. Although official policy by TCO is not to suspend recovery when a dispute is received (new policy implemented 15 July 2013), it is still worth asking DMB directly if they will suspend recovery. If they refuse, then it is crucial that the claimant set up a time to pay arrangement otherwise DMB will continue with their recovery action. This is especially important if distraint is the next step in the process.
Although distraint and referral to debt collection agencies are now the preferred method of enforcement, HMRC still reserve the right to take claimants to County Court.
In the past, some claimants who were taken to county court were not given the opportunity to challenge the recovery of the overpayment or even explain if they didn’t understand why they had been overpaid. Even at this stage it is possible that HMRC have given an incorrect explanation or have made a mistake in dealing with the overpayment. Some judges treated tax credit cases in the same way as ordinary tax debt, which meant that if HMRC produced a certificate of debt that was enough to gain judgement against the claimant.
This approach is incorrect. Tax debt cases follow a special procedure called CPRPD7D meaning they do not follow the normal allocation process. Critically CPRPD7D does not apply to tax credits overpayments which basically means that the claim should follow the normal court processes including allowing the claimant to raise a defence and requiring HMRC to answer the points of that defence. A full explanation of the importance of this can be found in an article we wrote in 2008 which explains the procedure.
We still strongly caution against allowing overpayments to reach the county court, but clarification of the status of tax credit debt cases means that claimants may have an opportunity to challenge aspects of HMRC’s case. It remains far from clear how far the courts will go in examining the papers and whether they will consider the test under COP 26. On that basis we prefer to ensure cases are dealt with before proceedings are started.
From April 2012, HMRC began charging costs on cases entered in the county court in England and Wales. Alternative arrangements are in place in Scotland and Northern Ireland. Previously HMRC were unable to recover their costs in going to the county court and obtaining judgement. These changes now align HMRC’s position with that of other creditors. This change came as a result of a consultation exercise carried out between 1 July 2010 and 23 September 2010. The consultation looked at the principle of charging costs where debt cases are entered in the county court in England and Wales and judgment is awarded in their favour. Following the consultation exercise, changes were introduced to the Ministry of Justice’s (MoJ) Civil Procedure Rules to award fixed costs to HMRC in successful court claims in England and Wales for recovery of tax. A summary of responses was published in January 2011.
Debt collection agencies
HMRC say that they may refer debt cases to private Debt Collection Agencies (DCA). This approach was piloted in 2011, and in the Autumn Statement 2012 HMRC confirmed they would once again pilot payment by results using a third party DCA. HMRC now routinely use private DCA to collect tax credit debts. You can find a list of agencies used by HMRC on the GOV.UK website. It should be noted that the debt remains a HMRC debt, the debts are not sold to the DCA.
Claimants should receive a final letter from HMRC urging them to make contact and agree a time to pay arrangement (over the default 12 months or longer if circumstances dictate) before the case is referred to the DCA.
Once the debt is passed to the DCA the same time to pay guidance should be followed as outlined in this section. Where a claimant asks for hardship provisions to apply or disputes the overpayment in any way, the case should be passed back to HMRC.
Section 29 Tax Credit Act 2002 has always contained a provision allowing HMRC to recover tax credit overpayments by adjusting the person’s tax code. The legislation states that in this respect tax credit overpayments are to be treated the same as underpayments of tax.
HMRC never used this method of recovery until 2011 when they set up a small pilot. In the earlier years of the system, HMRC prioritised debt recovery by value. Since 2009 they have moved away from this approach and used a campaigns based approach with attempts to segment the overpayment population based on behaviour and risk. As a result of this new approach, they have started to use new mechanisms for debt collection, one of which is collection via the PAYE tax code.
A change to the PAYE regulations was needed to enable debts to be collected in this way from those in PAYE employment or those in receipt of a UK-based pension. A consultation document was issued on the detailed regulations and the raising of the recovery limit to £3000. The responses to this consultation were published on the HMRC website. The regulations came into force on 20 July 2011.
In October 2014, new regulations came into force raising the overall recovery limit for relevant debt which can be recovered via the PAYE tax code. The new maximum limit is £17,000. The actual limit that applies depends on the claimant’s expected PAYE income in the tax year for which the code is determined.
The expected amount of PAYE income of the claimant in the tax year for which the code is determined
The total amount of debt that may be recovered in that tax year
Less than £30,000
No more than £3,000
£30,000 or more but less than £40,000
No more than £5,000
£40,000 or more but less than £50,000
No more than £7,000
£50,000 or more but less than £60,000
No more than £9,000
£60,000 or more but less than £70,000
No more than £11,000
£70,000 or more but less than £80,000
No more than £15,000
£90,000 or more
No more than £17,000
As a result, DMB will now identify tax credits direct recovery overpayments that are suitable for collection via an adjustment to the claimant’s PAYE tax code. This will apply to anyone in PAYE employment or in receipt of a UK-based pension. The first debts will be included in the 2012/13 code from 6 April 2012. It will continue to be used in 2014/15 and thereafter.
It should be noted that this method of recovery is voluntary under the legislation. However in practice HMRC appear to only allow the claimant to refuse if they offer to repay via another method.
The HMRC guidance explains the process as follows:
'DMB will issue a letter, to the selected customers, which explains that HMRC are considering collecting the tax credit overpayment by adjusting their tax code and increasing the amount of tax they will pay in the next tax year. The letter asks the customer to call DMB on 0845 302 1421 within 30 days, from the date of the letter, if they do not want HMRC to take this action.
The customer can contact DMB to discuss an alternative method of repaying the overpayment. DMB will not be aware of other financial commitments the customer has and it may be that in some circumstances agreeing a time to pay for the tax credits overpayment is more appropriate. If the customer does not contact DMB then checks will be made to ensure a code adjustment can be made. Existing safeguards that limit the amount that can be collected through PAYE will be preserved.
In a joint household award, two people will be named in the letter. DMB will attempt to adjust the tax code of the first named person. However, if this cannot be done DMB will then attempt to adjust the tax code of the second named person.
Where the code can be adjusted a form P2 Coding Notice will be sent to the customer around January / February.
If the code cannot be adjusted DMB will write to the customer and request an alternative method of repaying; normally by direct debit.
Where a couple are no longer together (Household Breakdown) DMB will not attempt to collect the overpayment by adjustment to either of their tax codes. In these circumstances DMB will expect each former partner to pay 50% of the overpayment. (But please refer to the guidance below if one former partner wants to pay more than 50%).'
Some further points to note about the process:
- The letters sent to claimants will not explain which year the debt relates to or how the debt is calculated, however a Statement of Liability should be enclosed with the letter stating the amount due. Any interest payable would be dealt with separately and not through adjusting the tax code.
- If the claimant is experiencing financial hardship, they should contact DMB immediately
- Where there is a household breakdown during the year, coding will continue until customers contact HMRC to object and request that the coding out is cancelled.
- The existing safeguards that exist to prevent excessive deductions from salary via PAYE will still apply. In addition, there is a priority order for including sums owed to HMRC. Underpayments arising under PAYE and income tax liabilities from submission from a self-assessment return will be included in the code ahead of any debts.
- The inclusion of debts in a person’s tax code means that their net pay will be reduced. If the claimant is receipt of means-tested benefits this could mean that they may receive more of the other benefits if they are based on net income. Each benefit has different rules, so care should be taken to check the position.
The Tax Credit Office is responsible for ongoing recovery cases. Ongoing recovery is used where there is an ongoing claim still in payment following the claim which gave rise to the overpayment.
Under the current version of COP26, there are certain limits on the amount by which payments of tax credits can be reduced in order to recover an overpayment which arose in the previous year (cross-year overpayment). Those limits, which depend upon a claimant’s income, are as follows:
- 10% of the award payment for claimants on maximum tax credits;
- 100% for claimants receiving only the family element of child tax credit; and
- 25% for all other claimants.
Sometimes HMRC will adjust an award during the award period in order to try to prevent an overpayment from accruing. In such cases the limits set out above apply to restrict recovery.
From April 2015, tax credits payments will be stopped in-year where, due to a change in circumstances, an award is reduced to the extent that the claimant has already received their full year’s entitlement for that award. This is to prevent a build-up of overpayments by the end of the year. Previously, HMRC continued to make payments to claimants in this situation (unless they specifically asked HMRC not to) all of which became recoverable overpayments at the end of the year.
Potential overpayments that are identified during the award period in this way are loosely termed in-year overpayments.
In the March 2014 Budget, the Chancellor announced that from April 2016 households with income over £20,000 will have their rate of recovery increased from the current 25% to 50%. See our policy section for details of this announcement.
In the Chancellor’s 2012 Autumn Statement, he announced that tax credit overpayments from old claims that had ended would be able to be recovered from a claimant’s ongoing tax credit payments, This applies from October 2014 onwards.
Essentially, it means that any households with outstanding overpayments from ended claims that include the same household member(s) will have those old debts recovered from the new ongoing award.
Cross award recovery will only take place when there is a suitable ongoing claim. This is one where:
- There are current year payments still to be made
- No payment suspensions exist
- A previous claim exists
- A household has not ended and the claim has not had entitlement ended
- There is no in year or cross year recovery already taking place except where active cross-claim recovery is already taking place
- No pending change of circumstances have been captured but have yet to be processed
Not all old overpayments can be recovered, the debt must be a ‘relevant overpayment’ which means:
- Does not have its recovery suspended for any reason
- The Notice to Pay (TC610) relating to the year of overpayment has an issue date recorded or the overpayment has been manually referred to DMB
- Have been referred to DMB for direct recovery but DMB have confirmed it can be returned back to the tax credits system.
Cross-claim recovery can apply in these situations:
- A joint ongoing claim can be reduced to recover debts from old single claims of one or both members of the couple.
- A single ongoing claim can be reduced to recover debts from an old single claim of the same person.
- A joint ongoing claim can be reduced to recover debts from an old joint claim if the same two people are involved in each claim.
Where an old debt is already being repaid, it will not be included in this ongoing recovery.
Ongoing tax credit payments will generally be reduced by 25% (or 10% if maximum award, see above) until the old debt is repaid.
Where there are a number of old overpayments from different years, awards or households, these will all be moved to the ongoing award and collated as one single overpayment amount.
But if the ongoing award ends before the total overpayment is repaid, the outstanding debts will be returned to their original awards. If there is more than 1 award involved, HMRC will apply a process called ‘reconciliation’ to apportion the amount repaid in a set order to the different overpayments and the outstanding debts will then have to be repaid by direct recovery (see above).
HMRC have produced a more detailed note about recovering old tax credits from ongoing awards, including full details of how the payments will be reconciled. More information can also be found in the Tax Credits Technical Manual.
In certain circumstances, HMRC will agree to reduce the recovery percentages further, or collect an overpayment over a longer period, or write off an overpayment altogether if the claimant is experiencing particular financial hardship.
Any financial hardship in ongoing recovery cases is dealt with by the Tax Credit Office. The first step is for the claimant to contact the tax credit helpline (0345 300 3900) to ask that the recovery percentage is reduced or the overpayment is written off on hardship grounds. The helpline should refer the case to the Tax Credit Office who will make a decision on whether the recovery rate can be varied.
If the claimant receives the family element only, HMRC will not normally adjust the rate of recovery. Nor will they do so if the overpayment was caused by deliberate fraud or error.
If a decision on hardship is required, TCO will pass the case to Debt Management and Banking (DMB) who will contact the claimant to check what is affordable. Once this information has been gathered, HMRC will decide whether to vary the recovery rate or remit (either fully or partially) the overpayment. The criteria used to determine this will be the same as that for direct recovery (see section 4.4 below). Once a decision has been made by DMB, they will inform TCO who will write to the claimant.
If advisers have all of the relevant information collected, they can write to the Tax Credit Office, Preston, PR1 4AT to make a request in writing.
The information in this section applies to both direct and ongoing recovery cases. Some claimants will not be able to afford to make any repayments to HMRC or will only be able to offer less than £10 per month. If that is the case, there are two potential options available. The first involves getting HMRC to suspend recovery of the overpayment until the financial situation improves or, in cases where there is unlikely to be any improvement in the claimant’s financial situation, the second option is to ask HMRC to write off the debt on financial hardship grounds.
Prior to March 2010, HMRC’s policy on financial hardship was practically non-existent. It was unclear to advisers when HMRC would write off overpayments on grounds of financial hardship and very few claimants were successful when requesting this. In addition, there was no clear process for such requests which meant they were often left for months with a back office team with whom neither advisers nor claimants could make any contact.
Since March 2010, DMB has revised its approach to the recovery of tax credit overpayment debt, which includes a much clearer policy on financial hardship and also more clarity around how this should be requested.
Claimants who are unemployed with no assets or savings
In such cases, HMRC should suspend recovery for 12 months. At the end of that period, the case should be reviewed and if there is no likelihood that circumstances will improve, consideration should be given to writing off the overpayment or, at the very least, suspending it for a further 12 months. If circumstances have improved, HMRC will seek a time to pay arrangement (see above for more details).
Pensioners are not mentioned as a specific group in the new HMRC guidance; however, where a pensioner is in receipt of pension credit and there is no realistic chance that their situation will improve, we believe the same criteria should be applied.
Claimant is on sickness/incapacity benefit
Where a claimant is in receipt of a sickness benefit such as incapacity benefit or employment and support allowance, cannot afford to offer any repayment to HMRC and there is little prospect of them ever gaining employment, HMRC should write off the outstanding overpayment. If there is some prospect that the claimant may be able to enter employment in the future, recovery should be suspended for 12 months and the situation reviewed at the end of that period.
Claimant unable to meet living expenses
In situations where a claimant cannot meet essential living expenses such as water, gas and electricity, they should request that the overpayment recovery be suspended until their circumstances improve. Where there is no likelihood that this will happen, a request for the overpayment to be written off on financial hardship grounds should be made. In our experience this is most likely to succeed where evidence of their current situation is given to HMRC.
The above information regarding financial hardship applies to both direct recovery and ongoing recovery cases.
The process for those subject to ongoing recovery is outlined in section 4.3 above.
For those in the direct recovery process, DMB are tasked with recovering the debt and it is with them that initial contact should be made to discuss financial hardship. Specifically claimants or their advisers should contact the Debt Management Telephone Centre (DMTC) (0845 366 1206) and the case should then be referred to a Debt Technical Officer. The DTO should then assess the case based on the information received or by contacting the claimant for further information. Any letter sent to the claimant should include a phone number for the DTO dealing with the case. The claimant should be informed by letter of the outcome, regardless of whether the decision is to temporarily suspend recovery or to write off the overpayment in full.
If DMTC refuse to consider hardship or make a referral to a DTO, the HMRC intermediaries guidance should be quoted and a complaint made.
The law says that an overpayment debt for a couple can be collected by HMRC in full (but only once!) from either the claimant or their partner. The stated policy of HMRC where this has happened following a household breakdown is to write to both members of the former couple (making every effort to trace any former partner for whom they do not have an up-to-date address).
If the claimant believes that there should be a difference in what they and their former partner should pay, then HMRC will take into account the circumstances of both of them and may ask each of them to pay a different amount, or one of them to pay the full amount. Alternatively, they can agree between them to pay different amounts and inform HMRC of this decision.
Prior to August 2009, HMRC policy was to allow each party to repay 50% of the overpayment. However, when confirming this agreement in writing, HMRC reserved the right to return to the partner who was engaging with them for the other 50% if they could not trace the other partner.
LITRG, along with other representative bodies, expressed concern that HMRC often pursued the engaging partner with vigour whilst the other partner remained ‘untraceable’. This often meant the mother with care of the children had to repay the whole joint overpayment debt where the absent partner was difficult to trace. Since August 2009, HMRC have implemented a much fairer policy in these situations. As before, provided a person engages with HMRC, they will allow repayment of 50% of the joint debt. Provided that this 50% is paid (either by lump sum or on a payment plan) HMRC will not pursue that person for the remaining 50%. Instead they will pursue the other partner, and if they cannot collect the money will not go back to the engaging partner to collect it.
It is important to note that the law still allows HMRC to pursue either partner for the full amount of the joint debt. Also, this process is not well advertised by HMRC, so you should ensure that you ask Debt Management and Banking if you think it applies to your client.
Sometimes, tax credit claimants who form a couple or who become single, either because they separate or because one partner dies, are slow in reporting the change to HMRC. Yet in many cases, if they had acted promptly they would have continued to be entitled to tax credits, albeit in a different capacity. Until 18 January 2010, HMRC would recover the whole of any overpayment arising on the old claim, but give no credit for what the claimant would have received had they made a new claim at the right time.
From 18 January2010, HMRC introduced a new policy that means tax credits recipients who start to live together, or who become single after being part of a couple, but are late reporting the change to HMRC, can reduce the overpayment on their old claim by whatever they would have been entitled to had they made a new claim promptly.
This new policy applies to overpayments arising from 18 January 2010, but also to overpayments that were still outstanding as of that date. So, if an overpayment has been repaid in full prior to 18 January 2010, the new policy will not apply. However, if any part of it remains unpaid, offsetting can be applied to it. To request notional offsetting, claimants should contact the tax credit helpline to ask for their case to be referred to the ‘notional offsetting (or notional entitlement)’ team in the Tax Credit Office.
Note that the notional entitlement set-off will not cover the one month by which the claimant will be able to backdate their new claim. Normally HMRC will grant the one month's backdating automatically, but if that doesn’t happen, they will need to ask for it.
HMRC policy is to not charge a penalty where the failure to report has resulted from a mistake or misunderstanding. If HMRC think the claimant has been negligent in not reporting, and they are left with a net overpayment even after notional entitlement has been applied, they may be charged a penalty against which they can appeal.
If the failure to report is dishonest, the penalty may well be substantial. HMRC will not allow notional offsetting in cases of deliberate or repeated error. In the last two years, we have seen an increase in the number of cases categorised as ‘deliberate error’ as a result of compliance checks. If advisers think that a case has been classified incorrectly, they should lodge a complaint (even if the decision is correct) if they believe the action was not deliberate but rather due to misunderstanding or mistake.
Some people will be paying back two overpayments, one via ongoing recovery and another via direct recovery. This often happens where there is an overpayment on an old claim, and a new overpayment on a current claim. Since August 2009, HMRC have implemented a new policy which means that any direct recovery action should be suspended until the ongoing recovery ends.
Whilst we welcome this policy, HMRC are not proactive in telling claimants about it. If this applies, you should ask Debt Management and Banking to suspend the direct recovery action. Further details can be found in the HMRC intermediaries guide and in the Debt Management Banking Manual Online.
The Financial Secretary to the Treasury announced, via written ministerial statement in September 2009, that a pilot would take place in 2010 to trial the recovery of HMRC tax credits and self-assessment debts from certain DWP benefits. HMRC then announced an expansion of that pilot and from 14th March 2011 they contacted around 4000 tax credits claimants and 4000 self-assessment customers with letters offering them the opportunity to join the scheme. The scheme was voluntary and claimants could choose whether to take part.
Further details about the pilot can be found in our policy section.
No results of the extended pilot have been published and no further announcements about this method of recovery have since been made.
Similarly, in the Autumn Statement 2012, HMRC announced a new pilot with DWP looking at ways of recovering money where debts are owed by the same person to both HMRC and DWP. Further details about the pilot can be found in our pilots being trialled section. No further announcements have been made about this pilot.
DWP will recover tax credit overpayment debts automatically from Universal Credit awards. See our Universal Credit section for more information.
New regulations from 1 April 2015 allow DWP to recover tax credit debt. These regulations are made under Section 126 Welfare Reform Act 2012 (which allows any tax credit functions to be transferred to DWP). The regulations allow DWP to recover tax credit by any of the methods it uses to collect its own debt, including deduction from benefit and Direct Earnings Attachment.
HMRC have produced some information for cases involving claimants with mental health issues. The following is reproduced from the intermediaries guidance:
HMRC will deal with mental health cases carefully and sympathetically to avoid distress to the customer.
HMRC will need a letter from a health care professional or mental health social worker explaining the mental health problem to enable it to deal with these cases. The evidence should include the nature of the illness and as far as possible, whether the illness is likely to be long-term (for example, schizophrenia) or where the prospects for recovery are expected to be good.
If the information has not been provided HMRC will need to write to the claimant or third party asking for the documentary evidence. Only in exceptional circumstances will the evidence received be insufficient to relieve the claimant from responsibility for payment.
If the mental health problems existed at the time the overpayment occurred then Benefits and Credits can consider whether exceptional circumstances are such that writing off the overpayment is appropriate. If the mental health problems exist at the time the overpayment is being recovered then DMB will review the circumstances:
- For sole debts HMRC will write to the third party and the customer to let them know that it will not continue with recovery of the overpayment.
- For joint debts HMRC will continue with recovery from the other partner in line with the section above.
- For Household Breakdown cases HMRC will write to the customer to advise them that it will not continue with recovery of their share of the debt. However, HMRC will pursue the ex-partner for their share of the debt (more information is available at section 3).
Further guidance for cases involving claimants with mental health issues can be found in the tax credit section of the DMB manual. Further information about the manual can be found in section 5.1.
In exceptional circumstances, for example where a claimant is seriously ill or a close family member is ill, a request can be made to HMRC to suspend recovery of the overpayment until such time as the claimant is able to discuss their financial situation fully with HMRC. Claimants or their advisers should phone the debt management telephone centre (0845 3661206)to explain the situation if this applies.
Updated 10 April 2015