Tax credit overpayments – official guidance
Simon Osborne describes the Inland Revenue’s Code of Practice on the recovery of overpaid tax credits.

Introduction
The Code of Practice
The general approach
Adjusting awards during the year
Overpayments at the end of the year
Hardship
Official error
Representation and appeals

Introduction
Under the tax credit rules, the Inland Revenue has the power to recover all overpayments of tax credits. However, it is not obliged to do so. Consequently, there arises the need for some form of guidance on the policy regarding overpayment recovery. For a discussion of some of the legal issues arising from the policy, see the article on p4.

The Code of Practice
The published form of the Code is entitled What happens if we pay you too much tax credit? Exactly under what circumstances this will be issued to claimants without them requesting it was unclear at the time of writing. It should be available at the Inland Revenue website (www.inlandrevenue.gov.uk) or from any Inland Revenue office or Enquiry Centre.

The Code should be considered very much as a statement of overall policy rather than a guarantee of what will happen in any individual case. It is also important to bear in mind that the Code is guidance, and not part of the statutory scheme. So although reference to it may be made for the purpose of a legal argument, tribunals, commissioners, etc, may well not consider themselves bound by it.

The general approach
The basic assumption made in the Code is that the Inland Revenue will recover overpaid tax credits. This applies both to overpayments proper (ie, those identified at the end of the tax year when actual entitlement for the preceding year is established) and to ‘likely’ overpayments arising during the year. In the latter case it would be more accurate, strictly speaking, to speak of reducing or eliminating a likely overpayment during the year, as it will not be established that there has indeed been an actual overpayment until the end of the year.

That general approach is tempered with a willingness to consider not recovering some or all of an overpayment where to recover would cause hardship, or where the overpayment arose due to official error and the claimant could not reasonably be expected to have realized an overpayment had occurred or was occurring. There is no indication of willingness to write off 2003/04 overpayments caused by the need to make interim payments made due to payment problems.

The Code does not set out comprehensive definitions of matters like what hardship or official error mean, or how concepts like the family or disability will be defined in relation to hardship issues, although more general guidance is given.

Adjusting awards during the year
In an improvement to the draft form of the Code, explicit reference is made to the approach taken to reducing or eliminating likely overpayments occurring during the course of the tax year.

The Code says that in such cases the Inland Revenue will ‘normally’ either reduce the award so that by the end of the year the correct annual amount is paid, or cease payment altogether if the claimant has already received their maximum entitlement or more than their maximum entitlement. In the latter case, there may be further action at the end of the year to recover the outstanding overpayment.

By way of mitigation of the potentially harsh consequences, the Code advises claimants to, ‘contact us if [payments of tax credits] are reduced to a level that causes you hardship or if you think a possible overpayment should not be recovered.’ It would appear therefore that the onus is on claimants either actually to experience hardship or realise that officials have got this wrong, or at least have an idea that hardship might arise.

In such cases, the Code promises that the Revenue will, ‘depending on the size of your award, make additional payments to bring your tax credits back to a higher level.’ In setting the level of such additional payments, the Revenue will ‘take account’ of the maximum amounts that would be used to reduce an award in the following year to reduce an overpayment (see below for more on maximum amounts). Exactly what this means was hard to say at the time of writing. It was clear however that the additional payments would then become an overpayment subject to possible recovery at the end of the year.
In cases of adjustments made in 2003/04 that the claimant thinks relate to likely overpayments caused by official error, the code advises the claimant to contact the Tax Credit Office or call the Helpline.

Overpayments at the end of the year
The Code also sets out the approach to actual overpayments, ie, those identified at the end-of-year reconciliation. Again, the general approach is that the Revenue will ‘usually’ recover such overpayments.

Overpayments will where possible be required to be repaid by reduction of tax credit award for the next year. The other two possible methods are: adjustment of PAYE code to increase deductions from earnings (but only for overpayments from 2004/05 and after) and by payments direct to the Revenue, within 30 days of the overpayment notice. For 2003/04 overpayments, such direct payments may be made in 12 monthly instalments.

Awards will be reduced by a percentage of the award, subject to the following maximums: 10 per cent for claimants receiving a maximum tax credit award; 25 per cent for claimants receiving less than the maximum but more than just the family element of child tax credit; 100 per cent for claimants receiving only the family element.

As with adjustments during the year, the only mitigation of the general approach concerns cases where recovery would cause hardship or where official error caused the overpayment, and it was reasonable for the claimant to think that the award was right. With regard to the latter, the Code mentions as official error cases of wrongful instruction by the Revenue to employers, and the Revenue not acting on information supplied by the claimant. Claimants can expect their notification of a change of circumstance to be acted on ‘within a few days’, but if it not acted on within a month and the Revenue considers it reasonable for the claimant to have assumed the award was correct, any resulting overpayment will not be recovered.

Hardship
The Code promises that the Inland Revenue will look ‘sympathetically’ at this issue but warns that all the circumstances must be taken into account. Factors the Code mentions are:

• income and living expenses;
• savings, investments and ‘other assets’ which might be used;
• other liabilities – eg, mortgage repayments, rent and rent arrears, overpayments of benefits;
• other payments due to the Inland Revenue;
• how long it will take to repay the overpayment;
• previous payment history;
• whether repayment will prejudice ability to meet essential costs – eg, fuel or water bills;
• whether there is a child or children aged under five or a ‘chronically ill or disabled person’ in the family whose health could be affected;
• any other other factors which may be relevant.

Official error
The Code does not set out a list of situations when the claimant can reasonably assume that their award is correct following official error. It does say that the Inland Revenue will expect claimants to spot mistakes like an award based on the wrong number of children, or an employer paying more tax credit than the award notice specified. Although official error is not defined, the code does say that a similar approach will be adopted where the error was that not of the Revenue but of another Government department.

Representation and appeals
The code advises claimants that they might want to get help and advice – eg, from a Citizens Advice Bureau. The Inland Revenue will deal with such representatives, but require written authority on a Form 64-8 or a short letter signed by the claimant including full name, address, postcode and any tax credit reference number. Telephone calls from representatives without such authority might still be accepted if the Revenue is satisfied that the claimant is present and confirms that they are happy for them to speak to the representative.

The Code advises claimants of the right of appeal against any new decisions on entitlement, either during the year or at the end of the year. However, it does not state explicitly the crucial fact that there is no right of appeal against a decision that an overpayment is recoverable, or how much is to be recovered and in what way. Legal challenges to recoverability decisions have to be made via judicial review.

Welfare Rights Bulletin 177 December 2003