Tax credit overpayments – rights and wrongs
Sarah Clarke considers some of the legal issues concerning overpayments of tax credits and the official approach to recovery.

Introduction
Tax credits – decisions
Section 28(5)TCA 2002
Example – reduction of likely overpayment
Effects of overpayment reduction/elimination on income support
Effects of overpayment reduction/elimination on housing benefit
What can advisers do?

Introduction
Overpayments of tax credits, and the Inland Revenue's approach to recovery in-year, is a burgeoning issue, and one which is causing serious problems. The official Code of Practice on overpayments has only just appeared, long after many claimants have already received amended award notices relating to in-year overpayments. Advisers had been led to believe that overpayments were not likely to be an issue until the end of the year. However, many claimants are having overpayments 'recovered' in-year at punitively high rates. CPAG is considering bringing a legal challenge to this.

CPAG has had many reports of overpayments which have been caused by official error, either in the initial award, or in the Inland Revenue's failure to act on a subsequent report of a change in circumstance. In many cases, claimants have not been aware that they were being overpaid. Award notices do not explain how awards have been calculated, so even if they contain obvious errors, claimants have no way of telling how these have impacted on the amount of tax credits. Even where claimants may suspect they are being overpaid, they will have no way of knowing how much by. The lack of information makes it very difficult to assess whether the award is correct, or whether the claimant has a basis for an appeal.

The knock on effects of in-year overpayment 'recovery' on income support entitlement can be disastrous, leaving many well below the poverty line. What has gone wrong?

Tax credits – decisions
By way of background it may be helpful to look at the way decision-making is structured for tax credits.

An initial decision on a claim is made under s 14 Tax Credits Act 2002 – this triggers an award notice, under s23. This does not at present include details of how the award has been calculated.

At the end of the year a final notice is given under s17. We understand these notices will include details of how the award for the year has been calculated. A final decision on entitlement is then made under s18.

Section 28 deals with overpayments. Section 28(5) deals with what happens when an overpayment is discovered in the course of a tax year. Section 28(1) deals with decisions on whether an overpayment is repayable at the end of the year. Section 29 is about how recovery of overpayments is made at the end of the year. There does not appear to be any requirement to notify a claimant of a decision under s28(5) or s28(1), or to give reasons.

Section 28(5)TCA 2002
The terms of section 28(5) are important; it states as follows:

'Where it appears to the Board 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; but this subsection does not apply once a decision is taken in relation to the person or persons for the tax year under s 18(1).'

At this stage any overpayment can only be a 'likely overpayment' since the claimant's entitlement for the year has yet to be determined. It is always possible that if the claimant's circumstances change before the end of the year, so as to increase entitlement, the likely overpayment could be reduced or cancelled out altogether. 'Recovery' is a term that relates to what happens at the end of the year, likely overpayments are 'reduced' or 'eliminated'.

There is no statutory test for when an actual or likely overpayment may be 'recovered'. This means that reduction, elimination, repayment and recovery are all decisions entirely within the discretion of the Inland Revenue. Section 38(1) TCA lists decisions which may be appealed. Decisions under ss28 and 29 are not among them. The fact that overpayment recovery is so dependant on Inland Revenue discretion means the Code of Guidance on Overpayments is a vital guide to policy in this area.

Decisions under s14 can be appealed, so if the Inland Revenue has made a mistake about the claimant's entitlement, the claimant can appeal against this. A decision to amend or terminate an award under s16(1) also carries a right of appeal. It is our understanding that, perhaps unsurprisingly, many claimants have appealed where there is no right to do so. In at least one of these cases it seems the Inland Revenue has contacted the claimant about a settlement. We understand the Inland Revenue may be stockpiling appeals where there is no entitlement issue.

On the face of it, section 28(5) gives the IR a broad discretion to do any of the following:

• Leave the award as it is. This may be appropriate where the overpayment is very small, where it is discovered near the end of the year, or where the claimant is expected to have a change of circumstances which will increase their entitlement.
• Amend the award so as to recover the full amount of the likely overpayment from the balance of payments due to the claimant for the remainder of the year. This will have the result of eliminating the overpayment.
• Where the claimant has already been paid more than his/her full entitlement, amend the award so as to stop paying altogether. This will have the effect of reducing the overpayment. If it does not eliminate the overpayment altogether and there is a balance left at the end of the year, the Inland Revenue will have to consider its discretion under s 28(1) to recover from next year's award.
• Amend the award so as to stop overpaying the claimant, and then pay the claimant's correct entitlement at a weekly rate for the remainder of the year. This will have the result of reducing the likely overpayment (see example below).
• Amend the award so as to stop overpaying the claimant, and then pay the claimant's correct entitlement at a weekly rate for the remainder of the year, but reduce the payments by a percentage. This will have the result of partly eliminating the overpayment.

The Code of Practice mentions only the second and third of these as options the Inland Revenue will 'normally' consider in-year – which means that the Code is aimed at eliminating as much as possible of the likely overpayment before the end of the year.

The Code goes on to discuss what will happen when an overpayment is discovered at the end of the year. In this instance, recovery for claimants receiving the maximum award will be at a maximum of 10%. For those receiving only the family element of CTC recovery will be at 100%, and for everyone else, the maximum recovery rate will be 25%.

For those claimants who have overpayments discovered 'in-year' there is no maximum limit to the amount by which their weekly payments can be reduced, they may be wiped out altogether. For those claimants relying upon tax credits as a subsistence benefit the effects can be catastrophic, because of the way the income support rules take tax credits into account.

Effects of overpayment reduction/elimination on income support
By regulation 7(1) Social Security (Working Tax Credit and Child Tax Credit) (Consequential Amendment) Regulations 2003 SI 455:

'In the case of a claimant for income support who makes a claim, or whose partner makes a claim, for a child tax credit, the Secretary of State shall treat the claimant's income as including an amount equivalent to the amount of CTC to which he, or his partner is entitled for the period specified in paragraph (3).' [Footnote 1]

Paragraph 3 goes on to specify a period from 7/4/03 to 6/4/04.

What this means is that the DWP will treat the claimant as though they were in receipt of their correct entitlement to CTC when their actual payments are far lower. [Footnote 2] This may work to their advantage, for instance whilst they are being overpaid tax credits, they may get income support on the basis of a lower income than they in fact have. However, where an overpayment is being recovered, the effect may be that they receive no income support, or a reduced income support top-up, and are reduced to an income below subsistence level. For those claimants who did not know they were being overpaid, so they have not put any money aside, this can cause very severe hardship indeed. This impacts directly on children as the payments affected are those intended to support them.

It is not yet clear what effect reduction of a claimant's payments to nil will have on passported benefits – the regulations dealing with passporting to health benefits in particular refer to 'receipt' of tax credits to qualify claimants.

CPAG is considering bringing a legal challenge to regulation 7(1).

Effects of overpayment reduction/elimination on housing benefit
The calculation for housing benefit works the other way around. It is the actual amount of tax credits claimants receive which is taken into account. There was a regulation that dealt with this, but it was repealed. We understand it will not be reintroduced as the government's view is that the issue is covered by the general income rules for HB. There is guidance to local authorities in Housing Benefit and Council Tax Benefit - A Guide to the New Tax Credits. At paragraph 1503 this states:

'The important points to remember are:
• ...
• you use the amount of the tax credit award that is due to be paid, ie after the deduction of any overpayment, to calculate the average weekly income
• …
• …'

From what we understand it seems that some local authorities may be getting this wrong, and clearer guidance may be needed.

What this means is that claimants may lose out on housing benefit whilst they are being overpaid tax credits, and if a likely overpayment is subsequently 'eliminated' or 'reduced', backdating issues may arise. On the other hand, depending on their circumstances, claimants may gain housing benefit when an overpayment is being recovered. (Claimants already entitled to maximum HB will not gain).

What can advisers do?
Regarding reductions of awards during the year to prevent a 'likely' overpayment, the Code of Practice offers a potential solution, where claimants suffer hardship or where there has been official error. The Revenue will in these circumstances make 'additional' payments. The Code is not clear how much these will be, but it is our understanding they are designed to bring the claimant back up to the level of their correct entitlement, less 10%, the maximum recovery rate for end of year overpayments.

Advisers may need to help claimants identify official error or explain how reduction will cause them hardship. The Code defines official error as 'you were paid too much because of a mistake by us and it was reasonable to think your award was right'. Factors to be taken into account in determining hardship are also listed.

The Code makes it clear that additional payments will count towards an overpayment at the end of the year. However at that point, claimants can argue that the overpayment should not be recovered, or only recovered at the limited rates that apply at the end of the year. It is not clear what the nature of the payments is, under what statutory authority they are paid, or how they will be treated for other benefits.

At the end of the year, the Inland Revenue will consider not recovering some or all of an actual overpayment, where it was caused by official error or where recovery would cause hardship. Again, advisers may need to assist in illustrating this to the Inland Revenue.

Advisers may want to check entitlement as there seem to be many mistakes about this. If the amount of an award is wrong, claimants can appeal. But there is no right of appeal against a decision to recover an overpayment. Decisions under s28(5) may be challenged by judicial review. If there is an issue about whether the Inland Revenue has exercised its discretion under s28(5) reasonably or lawfully, the claimant may need to be referred for advice on a judicial review.

Footnotes
1. This regulation has subsequently been amended by SI 1731 to make it subject to para (2) and reg 31(3) of the Income Support Regulations. [back to text]
2. In CPAG's view this may be challengeable. [back to text]

Welfare Rights Bulletin 177 December 2003