Welfare Rights: beating the tax credit system

    Tax credit overpayments resulted in claimants being asked for repayments and deterred others from applying. But Gary Vaux urges people to think again

    The tax credit system is now six years old, and you’d think, by now, that most of the problems would have been ironed out. Admittedly, there have been some improvements made to how the benefit is managed by Revenue and Customs (HMRC). But dealing with overpaid benefit is still the major headache – and some of the problems date right back to 2003-4 when the tax credit system was frankly a shambles.

    At that time, a massive £4bn was allegedly overpaid to tax credit claimants – and 1.5 million claimants were told that the overpayments were their fault and the money had to be repaid. HMRC rarely accepted “official error” and, when they were forced to, in individual cases they often countered by saying that the claimant should have realised they were being wrongly paid so it was still the claimant’s fault for not correcting HMRC’s mistakes.

    The effect of this has been to deter many people who are entitled to tax credits – families and lower-paid workers – from making fresh applications, as they simply don’t want the hassle and aggravation that they feel will accompany a new tax credit claim.

    This is a real shame. Research shows that, while take-up of child tax credit is fairly high, especially among low income families, take-up of working tax credit by lower paid workers is very poor – no more than 40 to 50% in some parts of the country.

    It’s important to note that working tax credit (WTC) isn’t limited to people with children. Single childless people, disabled workers and even couples surviving on low wages may well be entitled. For example, a 26-year-old worker who earns £215 a week gross is entitled to more than £15 a week WTC. But a disabled worker (such as someone who also gets DLA) on the same wages would receive almost £64 a week extra income from WTC. That should be of great value to many social services clients.

    There are some drawbacks, of course. For example, the minimum age for claiming is 25 (unless a parent or disabled), and WTC counts as income when housing benefit is worked out. But overall, it has to be worth looking at.

    HMRC have also slightly relented from their hard-line approach on overpayments, culminating in a new Code of Practice (COP26) issued in 2008 and available on the HMRC website.

    New pages have also recently been added to the Revenue’s manual for debt management staff. The section on recovery of tax credits now includes the following points:

    ● Mental health cases: If information is provided by a third party about the mental health problem of a claimant, HMRC can agree not to pursue the case.

    ● Domestic violence cases: HMRC can agree to apportion 50% of a debt to each claimant, to ensure that they do not have contact with each other regarding payment, addresses are not revealed and they do not have to meet in court. The claimants will no longer be jointly liable for the whole overpayment.

    ● Household breakdown cases: It can be provisionally agreed that a claimant can repay just 50% of an overpayment that arose when they were part of a couple, but both remain jointly and severally liable.

    HMRC says that overpayments of tax credits have fallen by £700m since 2005-6 and are now less than half the level of 2003-4. So the situation is improving, and the fear of being potentially overpaid and then asked to pay money back certainly should not be used as an excuse for people not to make a claim for what is rightfully theirs.

    Gary Vaux is head of money advice at Hertfordshire Council

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