Tax credit administration errors

Issue 200 (October 2007)

On 25 July 2007, the Financial Secretary to the Treasury, Jane Kennedy MP, issued a statement relating to administrative errors concerning some finalised awards for 2003/04, 2004/05 and 2005/06. The finalised award is a conclusive award and can only be revised under certain legal provisions. However some finalised awards were corrected – following information passed to the Revenue – using an incorrect procedure. Beth Lakhani looks at what this means for the awards concerned and provides some detail of the enquiry process.


Correct procedure for revising a finalised award

A finalised award can only be revised (other than on appeal) using the following legal provisions in the Tax Credit Act 2002:

  • Enquiry (s.19) – a power to investigate and revise decisions.
  • Discovery (s.20) – this power can for example be used if tax liability changes the potential tax credit entitlement.
  • Revision due to official error (s.21) – but this can only be done in the claimant’s favour and if the claimant applies for a revision.

There are time limits which restrict the operation of these powers; in particular it is now too late to use the enquiry process to correct the finalised decisions for 2003/04 and 2004/05. We understand that enquiries will be used to correct the decisions made for 2005/06.

Cases relating to 2003/04 and 2004/05

The Revenue is to carry out reviews of the 160,000 awards incorrectly revised in 2003/04 and 2004/05, and all decisions in relation to these years will be made in the claimants’ favour. We understand that claimants have been sent an initial letter (coded TC 954) telling them that a review is to take place but that they are not required to take any action. Further contact will be made with the claimants when the award has been reviewed.

Any finalised award which has been changed by an incorrect method is an invalid decision, therefore the decision that should stand is the finalised award. Any underpayments relating to 2003/04 and 2004/05 will be made good and any overpayments identified will not have to be repaid.

Case example

A claimant fails to declare that one of her children has left home in December 2004 so she no longer counts as responsible for that child. The claimant reports this fact late (after the renewal period April to September 2005) and a finalised award is issued based on the information that there were two children in the household throughout 2004/05 rather than until December 2004. The award is then corrected to reflect the late information. This is incorrect procedure.

To correct the finalised award in this situation, the Revenue should have carried out an enquiry (however brief) and then issued a new decision. The valid decision on entitlement for 2004/05 is the one based on an award including two children in the family for the whole year. Any overpayment arising from the corrected award will have been based on a decision that is not valid. This means that any collected overpayment is repayable to the claimant, and therefore, due to the Revenue correcting the finalised awards by the wrong process, some claimants will end up being paid more than their entitlement for the years 2003/04 and 2004/05.

This only applies to overpayments that are identified and collected as a result of an incorrect process. It does not mean that other overpayments will not be collected, a story which has been reported in some newspapers and on some websites.

In cases where the incorrect process produced an underpayment, the Revenue will have paid a lump sum to make good the underpayment. The Revenue will not seek to recover that lump sum.

Cases relating to 2005/06

A further 90,000 cases will be reviewed relating to 2005/06 finalised awards.

We understand that claimants whose finalised awards were incorrectly revised will be subject to the enquiry process and will have been sent letters (coded TC953) so that the investigation can be started within the time frame allowed. There is no guarantee in this case that the outcome will be favourable and it will be important for claimants whose entitlement has changed as a result to consider appealing the decision if there is any doubt about its correctness.

Advisers may want to request copies of award notices for 2005/06 and details of how the new entitlement has been calculated if the decision is adverse to the claimant.

Arguably, any overpayment recovered (based on an invalid revision) before the enquiry process began should be repaid to the claimant. In any case, any resulting overpayment should be added to the current overpayment figure (if any) and collected from the date of the new decision.

The enquiry process

An enquiry allows the Revenue to correct and investigate a finalised award and revise their decision. A claimant has a right to halt the enquiry process by applying for a direction to get a decision made. This application should be made in writing to the Revenue, and if the Revenue wants to continue with the enquiry the matter is heard by an appeal tribunal. A decision made on enquiry can also be appealed. The enquiry process can only be used once to revise a previous year’s entitlement.

The Tax Credit Compliance Manual (available at details the enquiry process. If, as a result of the enquiry, the claimant is subject to a penalty and/or interest on an overpayment, it should be noted that the Revenue do not impose penalties on those who cannot afford to pay. So, regardless of the failure by the claimant to make correct statements or provide information, the policy on the imposition of penalties and interest on overpayments for those on low incomes should be strictly limited.

Timing of enquiries and revised 2005/06 decisions

An enquiry cannot be carried out at any time – it must be started within a set time. In most cases the window closes one year after the deadline for returning the declaration of income (for 2005/06 this was 31 August 2006), thus the deadline for opening the enquiry is 31 August 2007.

In some cases, this will be a later date where the renewal papers were sent out later – a year after the date specified in the end-of-year notice requesting confirmation of income. For claimants required to file a tax return, the deadline for initiating an enquiry is the date on which the tax return becomes final. This is usually a year after 31 January following the tax year to which the tax return applies. Thus, for the tax year 2005/06 a return is final on 31 January 2008 and the deadline for the enquiry starting is therefore also 31 January 2008.

If a claimant has a letter after the appropriate deadline in their case, then an enquiry is not an option for the Revenue. We understand that the Revenue has begun enquiries within the deadline in the cases being reviewed, but advisers who have clients affected by this should double-check this.

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