Tax credits: offsetting overpayments

Issue 214 (February 2010)

Sarah Clarke provides an update on the 'offsetting' of overpayments which arise when a partner leaves or joins a household.

Background

This article updates the information in the article which appeared in Bulletin 211 on tax credits 'technical overpayments' and 'offsetting'. Please see that article for full details of the history and background to this issue.

If a claimant fails to report that a partner has left or joined the household, or delays doing so, an overpayment of tax credits will arise. This is because a tax credits claim ends when a claimant becomes or ceases to be part of a couple. If still entitled, the claimant must make a fresh claim as a member of a couple or a single person.1This is the case even if the partner's arrival or departure makes no difference to the amount of tax credits the claimant is entitled to, or even increases the claimant's entitlement. If the claimant reports the change in circumstances within three months and makes a fresh claim within that time, the problem should not arise, because the new claim can be backdated to cover the period of any overpayment on the previous claim.

New offsetting policy

The Revenue has now introduced a new policy, with effect from 18 January 2010, of offsetting underlying entitlement2against overpayments of tax credits which arise when a partner has left or joined the household. Previously, offsetting was only allowed in restricted circumstances (see Bulletin 211 for details). The new policy will apply to overpayments incurred from 18 January and also to overpayments which arose before that date, which are still in the process of being disputed or repaid. Note, however, that any amount of overpayment which has already been repaid will not be offset by underlying entitlement. The policy will apply to overpayments identified 'in-year' and to compliance cases where overpayments are discovered after the end of the tax year.

The new policy provides for the offsetting of the amount of tax credits the claimant would have been correctly entitled to as a lone parent or member of a couple (underlying entitlement), against the overpayment incurred. This means claimants will not have to make any repayment if underlying entitlement is equal to or greater than the overpayment. These cases are likely to arise where a couple separate, or if a new partner is in receipt of benefit because s/he is unemployed or incapable of work. Where underlying entitlement is less than the overpayment, claimants will have to repay the difference. This is likely to apply where the claimant has a new partner who is on a low income.

Claimants who would have been entitled to more tax credits had they reported the change in their status on time will not get their additional entitlement backdated beyond three months.

Note that, in each of the three examples given below, the overpayments had not been repaid. Any amount repaid cannot be offset under the new policy.

Official guidance

Amendments are to be made to the Tax Credits Manual and the Claimant Compliance Manual to reflect the new policy.

There is also an insert to the code of practice on overpayments (COP26)

We understand on-screen notes should prompt Revenue staff to apply offsetting where it applies; but claimants and advisers should also request it, where appropriate.

Offsetting and penalties

We understand that where the claim was incorrect from the outset, or in certain compliance cases,3there will be circumstances when offsetting will not be allowed and / or where penalties may be imposed. Where there was a failure to take reasonable care or serious error by the claimant, offsetting will be applied but there may be a penalty. Where there was deliberate, or repeated or systematic error by the claimant, no offsetting will be applied and there may be a penalty. If there was no negligence by the claimant, or the error occurred because of a genuine mistake or misunderstanding, the offsetting policy will be applied in the normal way without any penalty.

Note that the precise scope of the above restrictions and penalty regime was unclear at the time of writing. Further details will be given on our website when they become available. They may also be in official guidance (the Tax Credits Manual and Claimant Compliance Guide).

Challenges

A decision by the Revenue to not apply offsetting in a particular case is not be subject to appeal. Representations can be made to the Revenue, but the only legal remedy to pursue a challenge is judicial review.

Example 1

Sarah and Jim are a couple with 3 children. The youngest is severely disabled and needs 24 hour care. They are claiming income support (IS) and child tax credit (CTC). Jim leaves the household on 9 September 2009. Sarah does not inform the Revenue because she is too stressed and tied up with the care of the children. In her annual return submitted on 17 July 2010, she reports that she is a lone parent. She has incurred an overpayment from 9 September 2009. She makes a new claim on 25 September 2010, but this can only be backdated to 25 June 2010, wiping out the overpayment from that date. Under the new policy the overpayment incurred from 9 September 2009 to 25 June 2010 can be offset against the amount Sarah would have been entitled to as a lone parent from 9 September 2010. As this is the same amount as she received under the joint claim with Jim (i.e. maximum CTC), she will not have to repay an overpayment.

Example 2

Sophie is working part time and claiming CTC and working tax credit (WTC). On 12 October 2009 she is joined by her partner Charles who is an asylum seeker not entitled to work in the UK. Sophie does not notify the Revenue because it does not affect the amount of tax credits she is entitled to. She is therefore overpaid from 12 October 2009. Following advice from a CAB she notifies the change on 12 April 2010 and makes a new claim jointly with Charles which is backdated to 12 January and wipes out the overpayment from that date. Under the new policy, the outstanding overpayment from 12 October to 12 January is offset against the amount Sophie and Charles would have been entitled to as a couple from 12 October. As this is the same amount she received as a lone parent, she does not have to repay an overpayment.

Example 3

Barry is a lone parent in receipt of CTC and WTC. On 12 December 2009 he is joined by a new partner, Simone, who is in receipt of the highest rate of the care component of DLA. Barry does not notify the Revenue that Simone has joined the household until he notifies his new bank account details on 4 April 2010. He is therefore overpaid tax credits from 12 December 2009 to 4 April 2010. He makes a new claim jointly with Simone on 5 May 2010 which is backdated to 2 February, wiping out the overpayment from that date. The new award includes the severe disability element of WTC for Simone. Under the new policy the overpayment from 12 December to 2 February is offset against the amount Barry and Simone would have been entitled to as a couple. As this is more than the amount Barry received as lone parent, he will not have to repay an overpayment. The additional amount of WTC they are entitled to as a couple, however, because of the inclusion of a severe disability element, is only payable from 5 February 2010.

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

  • 1. A new claim can be made by telephone if the claimant's partner leaves, but will need to be made in writing if the claimant becomes part of a couple.
  • 2. Also referred to as notional entitlement.
  • 3. These will be cases where HMRC has discovered following a "compliance intervention" that the claimant has failed to notify a change from a previous year.