Overpayments and underpayments are a normal part of the tax credits system. This is because when you receive a tax credits award it is not final until after the end of the tax year for which it has been given.

The tax year runs from 06 April in one year until 05 April in the next year.

To start with the award is based on existing circumstances (for example, your situation with work or the number of children you are currently supporting) but using your income from the previous tax year.

It is possible in certain circumstances to have your award changed and based on a current year estimate if you anticipate your income will be less than the previous year. However, it is possible for an overpayment to occur if the estimate turns out to be too low.

After the current tax year has ended, when your income and circumstances and any changes during the year are known in full, it is then considered for adjustment. This adjustment process can, but does not always, throw up underpayments or overpayments. Use the link for information about the income disregard and its implications.

Overpayments are by far the most controversial aspect of the tax credits system. They can often run to several thousands of pounds before HMRC informs you.

HMRC expects even those overpayments which arise from their mistakes to be repaid; methods of recovery have often been harsh and had devastating effects upon claimants on low incomes, particularly in the first two years of tax credits (2003/04 and 2004/05).

Since then, HMRC and Government have listened more closely to representatives from those on the consultative body and have made a number of improvements, though there is still a long way to go before the problems with overpayments are completely resolved.

What are overpayments?

• Overpayments occur when, as the law says:

  the amount of tax credit paid for a tax year to a person or persons exceeds the amount of the tax credit to which he is entitled, or they are jointly entitled, for the tax year.

• The law goes on to say that HMRC may decide that the amount of the excess, or any part of it, is to be repaid to them. It also allows HMRC to adjust your award during the year in order to reduce or eliminate the likely overpayment.

• Similarly, HMRC may decide to treat any tax credit already paid to you as an overpayment, if they decide that you were not entitled to it.

• So you can see that the law gives HMRC complete discretion over whether to collect any overpayment, and how much of it to collect, or whether and by how much to adjust an award during a year in order to prevent an overpayment arising.

Causes of overpayments

Tax credits are designed to follow changes in income (to an extent) and personal circumstances. There are a number of reasons why an overpayment might arise following such a change:

• A large increase in your income from one year to the next. (This is less likely to occur now that the disregard is £25,000).



• You are late reporting a change in circumstances that causes your entitlement to fall – perhaps a drop in working hours, a change of household or a child leaves full-time education, etc.



• You report an estimated current year income which turns out to be too low



• HMRC delays processing a reported change.



• You make a mistake in your own favour on your claim form or renewal form.



• HMRC makes a mistake, whether human or computer error.



• An award is adjusted downwards following an investigation by HMRC.



• The payments you receive in the first few months of a new tax year (from April), before the renewal forms have been processed, are too high.



• You fail to complete your renewal forms on time.

Methods of recovery

There are two ways of collecting the overpayment from you, either from your ongoing award or by coming to you for a direct payment.

From an ongoing award

• HMRC normally try to recover an overpayment by reducing future payments of tax credits. If you receive the maximum amount of tax credits because you are on a very low income or on benefits, HMRC may not reduce your ongoing payments by more than 10 per cent in order to recover an overpayment.

• If you do not receive the maximum amount of tax credits, but your payments are higher than the family element of child tax credit (around £545 a year in most cases), then your ongoing payments can be reduced by up to 25 per cent. If you are in receipt of the family element only, HMRC can recover the overpayment in full from your ongoing award.

Since January 2007, HMRC systems have been adjusted so that the above percentages apply whether the overpayment relates to the year just gone or whether it is an adjustment of an award to reduce or eliminate an overpayment which has happened since the last 5th April. Previously, the percentage restrictions did not apply to in-year overpayments, and this caused a great deal of hardship.

• There are two circumstances when HMRC cannot collect an overpayment from an ongoing award:

  • One is where you are no longer entitled to, and no longer receive, tax credits – for example, if you were entitled to working tax credit only and your weekly working hours have fallen below the minimum requirement of 16 or 30 hours; or if you were receiving child tax credit for a child who is now over 16 and has left full-time education.

  • The other is where the claim on which the overpayment occurred is no longer in payment and you have made a new claim. This most often occurs following a change in your household (perhaps you have separated from your partner and are no longer entitled to make a joint claim, or you have a new partner). In these situations, an overpayment from your first household cannot be set against the tax credits receivable by the new household.

• When this happens HMRC pass the collection to their Debt Management and Banking section. They will send you a demand to pay within 30 days but give you a telephone number to ring if you want more time to pay. You should never hesitate to use this number - HMRC policy is to allow repayment over 12 months without question. If you want to make repayments over 3 years or less, HMRC should agree to this if the payments seem reasonable without requiring income and expenditure forms to be completed. Arrangements that will take longer than 3 years will require completion of income and expenditure details.

• 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.

• The law says that an overpayment debt for a couple can be collected by HMRC in full (but only once!) from either you or your partner. The stated policy of HMRC where this has happened to you is to write to both you and your former partner (making every effort to trace any partner for whom they do not have an up-to-date address).

• If you believe that there should be a difference in what you and your former partner should pay, then HMRC will take into account the circumstances of both of you and may ask each of you to pay a different amount, or one of you to pay the full amount. Alternatively, you can agree between you 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, providing a person engages with HMRC, they will allow repayment of 50% of the joint debt. Providing 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 for the money

• 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 and so you should ensure that you ask Debt Management and Banking if you think this applies to you

Appeals and disputes

• Everybody has the right to appeal to an independent tribunal against HMRC's decision on how much tax credits you should receive. That includes an award that shows an overpayment. You should make use of the right to appeal if you receive an award notice showing an overpayment that you do not think is calculated correctly (including if you do not understand how it arose or HMRC cannot give you a satisfactory explanation).

• On the other hand, if the overpayment is correctly calculated, and HMRC decide to recover it from you, then you do not have any independent right of appeal against HMRC's decision to recover it.

• However, there is a dispute procedure which you can use if you agree with the way the overpayment is calculated, but disagree with HMRC's decision to recover it because it arose through HMRC's own mistake.

• The dispute test underwent a radical overhaul with effect from 31 January 2008. Prior to this date HMRC operated the 'reasonable belief' test under which HMRC expected you to show:

  1. that the overpayment resulted from their error, and
  2. that it was reasonable for you to think that your payments were right.



• If you could satisfy both parts of the test, then it was likely that they would write off the debt. The second limb, (b) above, commonly known as 'the reasonableness test', was notoriously difficult to satisfy and attracted much criticism from representative bodies.

• Since 31st January 2008, HMRC have operated a new responsibilities test. The new test is based on a series of responsibilities on the part of both the claimant and HMRC. Finally, if both sides fail to meet some of their responsibilities there is likely to be a partial remittance of the overpayment based on the part that was apportioned to HMRC failing in their responsibilities. The full list of responsibilities can be found in the new version of COP 26 here. Any disputes that were first decided under the old test prior to 31 January 2008, and are re-submitted where the claimant believes there is new evidence, will be considered again using the old test.

• If the claimant meets their responsibilities, but HMRC fails to meet theirs – the overpayment will be remitted. Similarly, if HMRC meet their responsibilities but the claimant fails to meet theirs – the overpayment will not be remitted.

• Finally, if both sides fail to meet some of their responsibilities there is likely to be a partial remittance of the overpayment based on the part that was apportioned to HMRC failing in their responsibilities. The full list of responsibilities can be found in the new version of COP 26 here.

• Our understanding is that the new test will be used for any disputes outstanding or received on or after the 31st January 2008. This is regardless of when the dispute was received by the Tax Credit Office.

• Any disputes that were first decided under the old test prior to 31 January 2008, and are re-submitted where the claimant believes there is new evidence, will be considered again using the old test.

• You should put your case in writing, preferably by using the form TC846 provided by HMRC. Some award notices incorrectly suggest that there is a three-month time limit for disputing the recovery of an overpayment. HMRC have confirmed that this was a mistake.

• After your dispute is received by HMRC they will suspend collection of the overpayment until they have reached their decision. Once their decision is made, the overpayment will be released for recovery.

• If you disagree with their decision, you have the right to refer the matter to the Adjudicator's Office and from there to the Parliamentary Ombudsman once you have exhausted HMRC's own complaints procedures. But you do not have the right to appeal to a tribunal, except in the very small number of cases where an application to the High Court for judicial review of HMRC's decision might be made.

• It is important to note that current HMRC policy is not to suspend recovery of the overpayment whilst the complaint procedures are being pursued, nor whilst any explanation of an overpayment is sought prior to a dispute. LITRG believes that this is wholly unsatisfactory and that HMRC should immediately suspend recovery of an overpayment when an explanation of how it occurred is sought by a claimant. Similarly, they should suspend collection while a claimant proceeds through the complaints procedure when the complaint is about a dispute decision.

• It is a highly unsatisfactory situation, and in LITRG's view a clear breach of natural justice, that HMRC should be the judge as well as the jury in their own cause. LITRG and other representative organisations have unanimously lobbied for an independent right of appeal for a number of years, so far to no avail.

Notional Offsetting

• 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 January, 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 will apply to overpayments arising from 18th January 2010, but also to overpayments that are still outstanding as of that date. So, if an overpayment has been repaid in full prior to 18th 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 three months by which you will be able to backdate your new claim. Normally HMRC will grant the three months backdating automatically, but if that doesn?t happen, you will need to ask for it.
• On the whole HMRC policy is to be lenient and not charge a penalty where the failure to report has resulted from a mistake or misunderstanding. If HMRC think you have been negligent in not reporting, and you are left with a net overpayment even after notional entitlement has been applied you may be charged a penalty against which you can appeal.
• If your failure to report is dishonest, the penalty may well be substantial and in extreme cases notional entitlement will not be given

Hardship

• If you find you cannot repay an overpayment because of hardship, you should not hesitate to call the helpline. HMRC can in certain circumstances agree to take a smaller percentage of your ongoing payments than those shown above, or grant more time to pay in direct collection cases. In exceptional cases they will write off an overpayment, if satisfied on hardship grounds.

Further information

• The procedures outlined above are set out in HMRC's code of practice COP 26.

• In addition, we have produced information to help both claimants and advisers. There are various articles in our News section and the most comprehensive analysis of overpayments (which is written primarily for other tax credits advisers and therefore uses technical language) can be found as a pdf file.

• We have also written, in conjunction with Advicenow,a guide to overpayments for tax credit claimants.

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