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HMRC suspends recovery of disputed tax credit overpayments

Published on 7 November 2005

During questioning by MPs on the House of Commons Treasury Sub-Committee, the Paymaster General (the minister responsible for tax credits) announced that, subject to final testing of procedures, automatic recovery of disputed tax credit overpayments will be suspended from the middle of November.

LITRG welcomes this, provided that it is accompanied by a campaign to inform people of their right to dispute recovery of overpayments. But we wish to see further changes to make the ways in which overpayments are recovered fairer to the claimant. In particular we wish to see:

  • alignment of the method of recovering in-year overpayment with that used for collecting overpayments identified after the end of a tax year; and
  • a formal right of appeal against HMRC decisions about recovery.


The tax credits system is almost entirely computer-driven, and change is slow. Therefore, according to the Chairman of HMRC, it will be another 12 months before the process of suspending recovery of disputed overpayments can be automated. Meanwhile, the same result will be achieved by manual intervention from later this month.

Automatic recovery

HMRC's practice of automatically recovering likely overpayments identified during the course of a year has always been controversial. Its origin lies in section 25(5) of the Tax Credits Act 2002, which states that:

'Where it appears to the Board [HMRC] that there is likely to be an overpayment of a tax credit for a tax year under an award made to a person or persons, the Board may, with a view to reducing or eliminating the overpayment, amend the award or any other award of any tax credit made to the person or persons . . .' 


HMRC exercises this power by programming its computer to amend an award so as to recover 100% of the likely overpayment.

Top-up payments

This practice can result in payments of tax credits being reduced or even stopped without notice. Nevertheless, the HMRC computer continues to recover the overpayment, even if the claimant disputes it on the grounds that it arose from official error.

It can then be many months before the dispute is resolved, during which time the claimant might experience hardship. In such cases, claimants can ask for top-up payments of tax credits. If granted, such payments will restore their awards to a percentage of what they were receiving before the computer decided they were being overpaid.

Through being paid top-up, people on income support or jobseeker's allowance can usually have their payments restored to 90% of what they would have received had they not been overpaid. Similarly, others who are entitled to maximum working tax credit or maximum child tax credit, or whose award contains a disability element, can normally have their payments restored to 75% of what they were. Those who do not fall within any of the above groups, but whose payments have fallen by more than half, can generally get back 50% of what they were receiving previously.

But there are important exceptions. Top-up payments will not be granted to people who are receiving no more than the family element of child tax credit; to those whose income has risen by more than £2,500 in-year; or where HMRC have 'found something wrong with the information you provided about your claim'.

The main problem with automatic cessation of payment, followed by top-up payments to those who ask for them and who fall within the above categories, is that in too many cases the hardship resulting from abrupt and unexpected overpayment recovery is not alleviated. This is particularly so for those claimants who do not know about the top-up regime.

More generous rules for end-of-year overpayments

The practice with in-year overpayments contrasts unfavourably with overpayments identified after the year-end, as part of the renewal process, which HMRC prefer to collect by instalments from ongoing awards. The size of the instalments varies according to the personal circumstances of the claimant. Somebody on maximum tax credits should have their payments reduced by no more than 10%; while someone receiving less than maximum tax credits but more than family element of child tax credit should see a reduction of 25%. Only if you are receiving no more than the family element will your payments be reduced by 100% to collect any overpayment.

The end-of-year process does not depend on automatic recovery, and the restrictions on availability of top-up payments do not apply. In addition, the instalment reductions are more generous to the claimant than the proportions to which payments are restored under top-up.


The Paymaster General has declared herself satisfied that automatic recovery is necessary, telling MPs on the Committee that:

'The tax system is the tax system and it works on an automated process for very good reasons, particularly for in-year recovery . . . Frankly, I am convinced that in a system that is so large we have to have automated recovery.'


Thus, people who report their changes of circumstances and income in-year - as the Government wants - are treated less favourably than those who wait until the year-end to report on their renewal forms any changes they were not legally obliged to notify earlier. LITRG and others have for many months argued that this is unfair. Not only that, it can discourage people from improving their circumstances, particularly if it would entail a rise in their income later in the year. That seems odd in a system intended to reward work.

Moreover, the need for a formal right of appeal against HMRC decisions in overpayment recovery cases has yet to be addressed by Government.

All that aside, the decision to suspend automatic recovery in cases of dispute has to be welcomed as at least going some way to dealing with the problem. The message now has to go out, loud and clear, to all those affected by overpayment recovery, that they have the right to dispute it. The test of how effectively this policy works will rest on how many claimants receive and understand that message.

A new inquiry

Meanwhile, the Treasury Sub-Committee is to hold an inquiry into the HM Revenue and Customs' handling of the payment of tax credits. The focus of the inquiry will be on 'identifying future solutions to the difficulties which have plagued the system, rather than simply 'raking over' past administrative decisions and practices'.

LITRG will submit written evidence in response when called for.

Useful links

HMRC's code of practice on overpayment recovery - COP26

For more information from the LITRG site on tax credit overpayments generally, click here.


Contact: Robin Williamson (Tel: 0844 579 6700 Fax 0844 579 6701)

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