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.
- Methods of recovery
- HMRC guidance
- Direct recovery
- Recovery via PAYE tax code
- Ongoing recovery
- 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 (DM) arm for collection by direct recovery.
HMRC introduced new IT from October 2014 to allow ‘cross claim’ recovery whereby overpayments on a claim that has ended can be recovered from a subsequent new claim even if it is made in a different capacity (for example an overpayment from an old single claim can be recovered against a new claim as a couple). See below for more detail about how cross claim recovery works.
Tax credit overpayments can also be recovered from payments of Universal Credit and DWP have a power more widely to recover tax credit debts by any of the methods it uses to collect its own debt. You can find out more about the move of tax credit debt to Universal Credit in our Universal Credit section.
In 2011, following consultation with various representative groups, HMRC produced a detailed guide for intermediaries ‘How HMRC handle tax credit overpayments’. This guide was incredibly helpful in setting out the process that HMRC used to recover debts. This was withdrawn in 2014 and there is now very little published information for advisers in this area. We will continue to raise this issue with HMRC.
In the meantime, we suggest that advisers use the archived version of the guidance to negotiate with DM.
Direct recovery cases are dealt with by Debt Management (DM) which is a separate arm of HMRC to the Tax Credit Office (who deal with ongoing recovery issues). DM collect tax debt as well as tax credit debt although the processes for each are different.
The following table gives an overview of the direct recovery process.
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 (see GOV.UK for an example) 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 a longer period. It encourages claimants to contact the payment helpline on 0345 302 1429. The payment helpline is part of the contact centre directorate in HMRC.
Debt passed to Debt Management and Banking (DM)
If no response is received to the TC610, the debt will be passed from the Tax Credit Office system to Debt Management ‘s IDMS system. (A debt will transfer to IDMS 42 days after the TC610 or sooner if the claimant engages and agrees a payment plan).
DM will check whether the debt can be passed to one of the private debt collection agencies (DCA) that HMRC uses. If the case has a domestic violence marker, or a claimant or partner has died recently, or there is an outstanding appeal the case will remain with DM otherwise it will be passed to the DCA.
Debt Collect Agency recovery process
The DCA will attempt to contact the claimant to arrange payment. The claimant will need to speak to the DCA directly – they will arrange a time to pay and consider hardship requests (which are then referred back to HMRC – see below)
Case passed back to HMRC
Eventually, after at least 12 months, if there has been no contact with the claimant the debt will be passed back to HMRC. The case will be reviewed by a HMRC debt officer and they will attempt to contact the claimant to arrange recovery.
If no contact can be made, or the claimant refuses to make a payment arrangement, HMRC may consider using one of their enforcement powers such as taking control of goods (distraint) or county court action to recovery the debt.
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 a longer period, but does not set out any specific timescales or options. Instead it encourages claimants to contact the payment helpline.
What claimants are not told at this point is that DM have a time to pay system that allows repayments over much longer periods.
The following time to pay options are available:
- 12 months
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 will not automatically accept any offer up to 10 years and they will want to confirm income/expenditure. HMRC staff will try and negotiate a time to pay arrangement for the shortest possible time, however claimants should ensure what they agree to is affordable and realistic based on their income/expenditure.
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 the debt will be cleared in 3 years. Income and Expenditure will be required to justify any arrangement of less than £10 per month if the debt is not cleared within 3 years. If a claimant cannot afford £10 per month, then DM 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 remitting the debt on grounds of financial hardship.
- 10 years or more
DM 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 normally be accepted and HMRC should suspend the debt in those cases and review after twelve months. HMRC may accept payments of less than £10 if the expectation is the amount can be increased at a later date.
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. Our understanding is 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 taking control of goods (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 claimant thinks they should not have to repay, a dispute can be lodged, but it may be necessary to liaise with DM 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 (policy implemented 15 July 2013), it is still worth asking DMdirectly if they will suspend recovery. Note that there is no obligation on them to suspend recovery and if they refuse, then it is crucial that the claimant set up a time to pay arrangement otherwise DM will continue with their recovery action. This is especially important if taking control of goods (distraint) is the next step in the process.
Although taking control of goods (distraint) is 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.
Debt collection agencies
HMRC practice is now to refer the majority of tax credit debts to a private 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. 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.
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 states they are in hardship the DCA will gather information and then refer the case back to HMRC.
The information in this sub-section applies to direct recovery cases. Information about hardship in ongoing recovery cases can be found below. 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 (which will take longer than 3 years to clear). 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 remit the debt on financial hardship grounds. Debts remitted due to hardship remain recoverable but may be pursued until later review of financial circumstances.
Prior to March 2010, HMRC’s policy on financial hardship was practically non-existent. It was unclear to advisers when HMRC would remit 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, DM 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. This was set out in HMRC guidance which has since been withdrawn, however as far as we can ascertain DM still follow the same processes.
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 remitting 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). If a claimant becomes entitled to universal credit then the tax credit debt can be collected by DWP from the UC award.
Claimant is on sickness/incapacity benefit
Where a claimant is in receipt of a sickness benefit such as employment and support allowance, cannot afford to offer any repayment to HMRC and there is little prospect of them ever gaining employment, HMRC should remit 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. If the claimant becomes entitled to universal credit then the tax credit debt can be collected by DWP from the UC award.
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 remitted 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.
Financial hardship process
For those in the direct recovery process, DM 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) (0345 3021429) 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 remit the overpayment in full.
If DMTC refuse to consider hardship or make a referral to a DTC a complaint should be made.
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 which was rolled out in 2013/14, However, HMRC have stopped using this method from 6 April 2016 in order to prepare for the transition of debt from HMRC to DWP with the introduction of Universal Credit.
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.
In the legislation, 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 depend upon household income . From April 2016, the limits 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;
- 25% for all other claimants with current year income up to £20,000; and
- 50% for all other claimants with current year household income over £20,000.
The 50% rate was introduced from 6 April 2016. In assessing whether the claimant has income over £20,000, HMRC will use the latest held income figure. This could be a current year estimated figure or the previous year income figure. This may not be the same figure as the claim is based on. It also means that claimants may delay reporting changes in income to HMRC where such a rise will take them into the 50% recovery rate.
In addition, from October 2015, HMRC began to recover WTC overpayments from CTC awards and CTC overpayments from WTC awards. Prior to that date, WTC overpayments were only recovered from WTC and CTC overpayments from CTC.
Sometimes HMRC adjust an award during the award period to try to prevent or reduce an overpayment from accruing by the end of the tax year. Potential overpayments that are identified during the award period in this way are loosely termed in-year overpayments. In such cases, the limits above also apply.
However, since October 2015, tax credits payments are now stopped in-year where, due to a change in circumstances, an award is reduced to the extent that the claimant has already been paid 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.
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 change was introduced from October 2014.
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 claim 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 DM
- Have been referred to DM for direct recovery but DM 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 directly, it will not be included in this ongoing recovery.
Ongoing tax credit payments will generally be reduced by 50%, 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 from the figures set out above.
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. The helpline should refer the case to the hardship team in the Tax Credit Office
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 error or fraud.
Once a referral is received by the hardship team, they will send out an income and expenditure form to the claimant along with a letter stating what evidence they require. Once the form is returned, HMRC will compare the income and expenditure figures against figures they hold for various household expenses and make a decision. Sometimes HMRC may contact the claimant by phone or letter for more information or evidence before making a decision.
If the claimant has disposable income of £20 a month or more, HMRC will refuse to change the recovery rate.
If the claimant has disposable income of less than £20 a month, the recovery rate will be reduced in 5% increments until the disposable income figure reaches £20 a month.
Any arrangement will only last until the end of the current tax year. It appears there is no way to challenge a refusal to reduce the percentage recovery rate, but a fresh hardship request can be made. If the cases warrants it, a complaint could also be 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 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.
See our understanding couples section for more information about how to request notional offsetting.
In cases where a claimant has reduced their working hours to below 16 hours a week and would have been entitled to Income Support instead of working tax credit, had they made a claim, HMRC can reduce the amount of the tax credit overpayment by ‘off-setting’ the amount of Income Support the claimant would have been entitled to against the overpaid tax credit. HMRC call this type of off-setting Class 11 remission. It is not widely known and for that reason can often be overlooked. Claimants and their advisers may need to ask HMRC to consider Class 11 remission, rather than rely of HMRC to automatically apply it. Further information is available in the tax credit manual.
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 Debt Management Banking Manual Online.
When a person claims Universal Credit, any outstanding tax credit overpayments will at some point be transferred from HMRC to DWP. This includes any overpayments where claimants have already agreed time to pay arrangements with HMRC. DWP can recover tax credit overpayment debts automatically from Universal Credit awards and will also consider separate time to pay arrangements. 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. Once a tax credit debt has transferred to DWP, it will remain with DWP even if the claimant no longer claims UC.
See our transition to UC section for more detail.
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 DM 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 DM 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 payment helpline (0345 302 1429) to explain the situation if this applies.
Updated 12 September 2016