Overpayments and tax credits: what now? | CPAG

Overpayments and tax credits: what now?

01 June 2018
Issue 264 (June 2018)

Since tax credits were introduced in 2003, the system has struggled to cope with the problem of overpayments. As we enter the final phase before tax credits are replaced by universal credit (UC), pressures are building up again. Mark Willis explains.

Migration to universal credit

The Universal Credit (Transitional Provisions) Regulations 2014 make changes to the Tax Credits Act concerning finalisation of tax credits and the treatment of overpayments. These changes only apply when a claim for UC is made, or treated as made, during a tax year in which a claimant was entitled to tax credits, and the DWP is satisfied that the claimant meets the basic conditions for UC. This triggers termination of the tax credits award, which is finalised during the year, and an overpayment of tax credits may be treated as an overpayment of UC. The Public Accounts Committee has raised concerns that vulnerable people receiving tax credits are at increased risk of financial problems as they transfer to UC.1">https://publications.parliament.uk/pa/cm201719/cmselect/cmpubacc/456/456... The government’s response states vulnerable claimants will be given support and importantly that debts are only transferred when they are not subject to ongoing disputes or appeals.2

However, CPAG has already heard of cases – through our early warning system – where claimants have only challenged the overpayment once recovery from UC has begun. They are told that it is no longer anything to do with HMRC after it has been transferred, and that the DWP cannot investigate the circumstances that gave rise to the debt. Tax credit claimants with outstanding overpayments at the point of transfer should ensure that they dispute recovery to HMRC as soon as possible (guidance says within three months), or request a mandatory reconsideration/appeal against the entitlement decision within one month, or if late give reasons. These should continue to be dealt with by HMRC, and the debt should not be recovered from UC while the dispute or appeal is ongoing.

Notional entitlement

The perennial problem of notional entitlement remains, as one of the most common reasons for migration to UC is a change in single/ couple status, which terminates the existing tax credit award. If this change should have been reported earlier, there will be an overpayment of tax credits. These ‘technical overpayments’ are largely attributable to a difference in the design of tax credits compared to means-tested benefits – ie, that a change in single/couple status terminates the award and a new claim is required. For UC, the rule allowing a claim to be treated as made by both members of a couple suggests some lessons have been learned from the tax credits experience.3 For other means-tested benefits, a change in single/couple status is a change of circumstances that requires an ongoing claim to be reassessed, and the process of offsetting notional underpayments against overpayments is a legal requirement.4

For tax credits, the process of reducing or cancelling out the overpayment by offsetting the amount the claimants would have been entitled to if they had claimed correctly is part of the exercise of discretion in whether to recover the overpayment. It has often been difficult to achieve, with no clear way of requesting it, and ever-changing guidance. Last year, the Adjudicator investigated the problem and found notional entitlement was not being applied correctly.5">www.adjudicatorsoffice.gov.uk/pdf/report2017.pdf She highlighted that in many ‘deliberate errors’ it was clear the customer had not been attempting to gain a financial advantage.

In a statement to the Adjudicator, HMRC said:

‘Eligibility for notional entitlement is to be considered in all cases where a tax credit claim has ended due to a household breakdown and a new household make up has been established and the claim for tax credits has been awarded, with a gap of 31 days or more in-between those two successful claims. Instead of withholding [notional entitlement] as the consequence for late or non-reporting of a change of circumstances, we should be making better use of the penalty process which has a slightly different (and correct) definition for fraudulent behaviour.’

The move to UC means that an insistence on a new tax credits claim being made is no longer reasonable, but both members of a couple need to provide the necessary details for notional entitlement to be calculated. It does appear that there has been some improvement in the process and HMRC says that notional entitlement is awarded in the majority of cases.


However, there remains inconsistent practice and a lack of clear guidance. HMRC has since clarified that it will not apply notional entitlement ‘in the previous year if the customer has acted fraudulently (i.e. where we have evidence that the customer has set out to mislead HMRC), or if the customer has been given Notional Entitlement in the past.6 Its definition of fraud in this context is not linked to a decision to impose a penalty or prosecute, but includes ‘any other wrong declarations where the information concerns the customer’s own circumstances which they can be reasonably expected to know; for example, claiming as a single person when it was clear that a joint claim should have been submitted, such as being married with no reason to think that the claim should have been anything other than a joint claim.’

CPAG has raised concerns that withholding notional entitlement is being used as a punishment. In contrast, HMRC’s statement to the Adjudicator said penalties should be used more effectively instead.

The key difference is that the amount of a penalty for fraudulent behaviour is limited by law, and by guidance to the amount ‘over-claimed’, and carries a right of appeal to a tribunal, but withholding notional entitlement can mean the claimant being required to repay an unlimited amount with no right of appeal. HMRC again seems to have lost sight of the fact that the overpayments in these cases are amounts that the claimant would have been entitled to anyway, so s/he has not gained anything. Claimants still refused offsetting of notional entitlement may wish (given the lack of an appeal right about overpayment recovery) to consider judicial review.



Please be aware that welfare rights law and guidance change frequently. Older Bulletin articles may be out of date. Use keywords or the search function to find more recent material on this topic.

  • 1. Public Accounts Committee Report into HMRC’s Performance in 2016–17,2. Treasury Minutes, Government response to the Committee of Public Accounts on the Twelfth to the Nineteenth reports from Session 2017-19, March 2018 (para 7.4)
  • 3. Reg 9(4) Universal Credit etc, (Claims and Payments) Regs 2013
  • 4. Reg 13 of the Social Security (Payments, Overpayments and Recovery) Regs 1988
  • 5. 6. Benefits & Credits Consultation Group email, 29 March 2018