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Overpayments Ahead

08 September 2004 / Andrew Goodall
Issue: 3974 / Categories:




Overpayments Ahead


ANDREW GOODALL takes stock of the tax credits system in the run-up to the renewals deadline on 30 September 2004.





Overpayments Ahead


ANDREW GOODALL takes stock of the tax credits system in the run-up to the renewals deadline on 30 September 2004.


THE INLAND REVENUE did not expect professional advisers to get too involved in the new tax credits system. The primary aim of the régime is to tackle child poverty and, generally speaking, poor families do not have tax advisers. But the Revenue now seems to recognise that a lot of tax advisers are playing an important role, not least because middle-income families can claim tax credits and the measure of income is linked loosely to the self-assessment tax return.


Understandably, the Revenue has focused on providing information and support to voluntary groups, which have had to tackle some of the worst complexities, such as the interaction between tax credits and other benefits, but professional advisers who have been drawn in have been frustrated by several problems. A real bugbear seems to be a continuing failure of tax credits helpline staff to trace 64-8s that have been logged onto another Revenue system.


A Revenue spokesman said that when correspondence was received from an agent and 64-8 details were not shown on the tax credits system, tax credit office staff cross-referenced other Revenue systems for existing 64-8s, and that this was 'successful in the vast majority of cases'. However, tax credits helpline staff did not currently have access to the relevant systems. At the time of writing, the Revenue was 'urgently seeking a solution'. A reasonably trouble-free renewals process is critical to the stability of the system. The Inland Revenue has insisted that the process is going well and that enquiry centres will be 'appropriately resourced' in the run-up to 30 September — the deadline for renewal of 2003-04 claims — but overpayments may present real, lasting difficulties.


Just to recap, a claimant in receipt of more than the family element of child tax credit will need to sign a declaration relating to income, etc. and if this is not done by 30 September 2004, the payment of tax credits will cease. If estimated figures are used (for example, because the claimant is self-employed), the final figures must be supplied by 31 January 2005. If that deadline is missed, a new claim will have to be made for 2004-05, and this may well mean that tax credits are lost as claims can only be backdated by three months.


Policy and reality


What about the wider picture, and is the policy working? An excellent insight has been provided by the Child Poverty Action Group's June 2004 report, Tax Credits: One Year On, by Marilyn Howard. Parts of the 80-page report make pretty grim reading.


Dr Paul Dornan, the group's policy officer, said in a foreword that 'high-profile administrative chaos and maltreatment of recipients by the Inland Revenue' might have damaged the reputation of the system. Serious structural issues — in particular the annualised system of assessing income in an effort to align tax credits with the tax system — and the problems of complexity with child tax credit appeared to 'bear most heavily on those on the lowest incomes', he said.


Where these structure and delivery problems together had caused hardship, this ran 'directly counter to the child poverty reduction agenda propounded by the Government'.


Dr Dornan added that the potential for large underpayments or overpayments to be built up was inherent in the annualised system of assessment. This struggled to fit in with weekly-assessed benefits, such as income support and housing benefit, causing further problems for poorer families.


Dr Dornan warned that the Revenue must minimise both underpayments and overpayments and, where overpayments occur, it should 'exercise proper discretion' when deciding whether to recover them. There was some evidence that the way in which the Revenue had clawed back overpayments had been ill thought through and unclear, often placing families in genuine hardship.


The Child Poverty Action Group's chief executive, Kate Green, said last month that too much confusion remained amongst claimants. She welcomed the additional resources provided by the new tax credits and was pleased with their positive impact for many low-income families, but complained that the system remained 'riddled with problems that are not being addressed'.


She added:

'The system is so complicated, too many people still do not understand it. There are also problems with overpayments where claimants are being paid incorrect amounts through no fault of their own — and are then having money taken off them, leaving them and their children with very little to live on.'

During 2003, the Child Poverty Action Group encountered Revenue errors resulting from the mis-reading of forms by Revenue equipment, delays and mistakes in inputting changes of circumstances data into computers, and incorrect backdating of awards. Claimants also reported incorrect information being given to them by advisers, including the Revenue.


The report also pointed out that tax credit award notices do not explain how entitlement has been calculated, so claimants do not know whether or not they have been overpaid in error. Nor is there any notification of an overpayment as such during the year; the claimant simply receives an adjusted award notice and so 'may not clearly understand that an overpayment has occurred'.


Kate Green said a simpler, easier to use, system would ensure that families who 'desperately need money which is rightfully theirs' receive the right amounts on time.




The Child Poverty Action Group called for an amnesty on all overpayments arising from the system's first year of operation, except those caused by claimant fraud. A hundred Members of Parliament signed an early day motion calling for such an amnesty. The group said that this would 'wipe the slate clean' after the early problems and help the Revenue 'establish itself as an organisation capable of understanding the hardship that its own administrative practice may cause for lower-income families'.


Marilyn Howard's report noted that since all claimants from working families had their 2003-04 tax credit awards based on their 2001-02 income, overpayments were 'particularly likely' because some of the income data was almost two years' old.


Revenue code of practice


A claimant can appeal against a decision as to the amount of an award, but there is no right of appeal against a decision to recover an overpayment, nor against a decision as to how much is recovered and when.


Last month, the Inland Revenue published an updated version of its Code of Practice 26; What happens if we have paid you too much tax credit? This is available on the Revenue's website at


The new version seems to focus on how overpayments can arise for 2004-05, whereas the burning issue just now is how the Revenue is going to deal with 2003-04 overpayments, many of which will have had a knock-on effect because most provisional 2004-05 payments are based on information sent to the Revenue long ago. Many awards for 2003-04 will not be finalised until after January 2005, and this will be 22 months after the first provisional payments were made in April 2003.


In-year recovery


The Revenue's power to recover overpayments discovered during the tax year is contained in section 28(5), Tax Credits Act 2002. This permits, but does not oblige, the Revenue to recover overpayments 'in-year'.


There is no limit to the amount by which payments of tax credit may be reduced where an overpayment is discovered 'in-year'. The Child Poverty Action Group said that during 2003-04 the Revenue 'routinely' recovered overpayments at a rate designed to clear the debt by the end of the tax year. In some cases, this practice could 'increase the risk of children falling into poverty'.


With regard to in-year adjustments, Code of Practice 26 says: 'you will need to ask us if you want us to review your payments'. It sets out various circumstances, mostly in terms of the level of tax credits or other benefits received, in which the Revenue will make 'additional payments'.


The effect of any such additional payments is that the Inland Revenue will withhold no more than a given amount, between ten and fifty per cent, of the tax credits for the rest of the year, in order to recover the overpayment. This approach will mean that part of the overpayment remains outstanding at the end of the tax year, to be recovered in the following year.


End-of-year recovery


Overpayments discovered after the end of the year, when an award is finalised, are governed by sections 28 and 29, Tax Credits Act 2002. Three different methods of recovery are available to the Revenue, being:

* direct payment;

* adjustment of the PAYE code; or

* reducing the tax credit award for the current year.

The Inland Revenue can request direct payment within 30 days, but has indicated that for overpayments arising in 2003-04 and 2004-05, claimants will be able to pay in 12 monthly instalments if they wish. It had already announced that the adjusted pay-as-you-earn code option would not apply to 2003-04 overpayments, but the new Code of Practice 26 does not mention this option at all.


Regulation 12A of the Tax Credits (Payments by the Board) Regulations SI 2002 No 2173 (inserted by Regulation 18 of The Tax Credits (Miscellaneous Amendments) Regulations SI 2004 No 762) places limits on recovery by means of deduction from current awards. These are reflected in Code of Practice 26, which sets out the maximum amount by which a current award may be reduced:

* ten per cent for claimants receiving the maximum award;

* 25 per cent for those receiving less than the maximum award, but more than the family element of child tax credit; and

* 100 per cent for claimants receiving the family element of child tax credit only.

The Child Poverty Action Group report suggested that the difference between the ten per cent and 25 per cent recovery rates could discourage some claimants from taking up employment, because marginal increases in income could produce dramatic differences in recovery rates.


Claimants no longer in receipt of tax credits — because their income is too high — will be asked to make a direct payment, over 12 months if they wish.


Hardship and official error


The Revenue has indicated that it will reduce, reschedule or forego repayments of overpaid tax credits if it accepts that hardship would result otherwise, or if the overpayment was due to official error. The new code of practice lists the factors the Revenue takes into account when assessing whether full recovery would cause hardship.


In cases of official error, it must have been reasonable for the claimant to think that the award was correct. Claimants are expected to notice, for example, if a child is missing from the award notice.


A little-known form TC846 — 'Request to reconsider recovery of tax credits' — was published on the Revenue's website in August. The Revenue said it had been available for several months.


No mention of the form appeared in the updated Code of Practice 26 and its publication was not announced.


The Revenue has pointed out that anyone looking at the website for the Code of Practice 'will be informed of the availability of the TC846'. It seems likely that many readers will miss it, especially the less well-off who do not have Internet access, but the Revenue said that the form was 'issued by Tax Credit Office whenever claimants who have received revised award notices have asked that we reconsider whether they should be expected to repay an overpayment'. The form has been available recently, on request, from the leaflet orderline: 0845 9000 404.


The form TC846, unlike the tax credits claim form TC600, has a lot of white space. Claimants are asked to choose one or more of the following three options, and enter their reasons for believing they should not be asked to repay, before sending it to the Overpayments Dispute Team:

* I/we thought the correct amount was being paid because …

* I/we could not tell that the payments were wrong because …

* I/we knew the payments were wrong and took the following steps to tell you …

The Revenue will be conscious of the need to use the present media campaign and other means at its disposal to tell claimants everything they need to know, if the long process of rebuilding confidence in the tax credits system is to succeed. Whether the new Code of Practice 26 will help this process along remains to be seen.


Andrew Goodall, CTA is a freelance writer and author of 'Tax Credit and Pension Credits explained', the Tolley's Tax Digest published in April 2004.



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