Tax credit overpayments: at last a less draconian stance

Welfare rights advisers generally promote benefit take-up, but occasionally we can find ourselves helping people who have been overpaid rather than underpaid. And in recent years, especially for lone parents and many other families, the biggest culprit has been the tax credit system.

This is not, in the main, about deliberate acts of fraud. The initial problem is usually error – by the claimant or Revenue and Customs – but what compounds it is what is done by the tax credit office to “correct” the overpayment.

The amounts involved are staggering. Tax credits worth £1.7bn were overpaid in 2005-6 alone. Of the £47bn of tax credits paid over the three-year period since tax credits were introduced, around 12.5% (£5.8bn) was overpaid. Some of that has had to be written off but about £3.9bn has been, or will be, recovered from claimants. And it’s that recovery action that is the root of the problem for many families.

If you apply for tax credits, supply the necessary information and get a decision, followed by a payment, then most people would assume that they have a right to the money they have received.

Revenue and Customs doesn’t see it that way though: in its eyes, it is normally “reasonable” that you should be able to tell if you are being overpaid or not. And if you are, you’re supposed to notify them and send the money back.

If you don’t – don’t worry, Revenue and Customs will just stop your payments altogether until it has recouped what it accidentally paid you. Official error? Rarely happens! Hardship caused by sudden ending of tax credit payments? Not its problem.

This certainly seemed to be the approach during the first couple of years of tax credit implementation. But there are now signs that Revenue and Customs is moving to a less draconian stance.

In its 2007 departmental report, the Revenue says that in cases of official error they plan to introduce a pilot “independent review” system later this summer, with a proportion of cases being offered the new service. According to its report: “If a claimant disputes the recovery of an overpayment and, after review, we conclude it is recoverable under the code of practice, we will give the claimant the option of having this case reviewed by the adjudicator by a fast track process.”

Elsewhere in the report, the Revenue also announces that automatic limits on the rates of recovery of overpayments will be introduced this summer.

Ideally, of course, there should be a right to an independent appeal hearing in all cases of tax credit overpayment but at least things are moving – slowly – in the right direction.

Incidentally, in April, Revenue and Customs launched an amnesty for people who hold offshore bank accounts and who had “forgotten” to pay tax on them (that is, committed the illegal act of tax evasion). Instead of penalties of up to 100% of the tax owed, anyone who made a full disclosure by 22 June will pay just 10%. And if the tax owed is less than £2,500, it will waive penalties altogether. Now, if only tax credits could be paid into offshore bank accounts

If you are helping families who have allegedly been overpaid: visit www.hmrc.gov.uk then type COP26 into the search box.

Gary Vaux is head of money advice, Hertfordshire Council. If you have a question e-mail graham.hopkins@rbi.co.uk