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Last Updated: Wednesday, 31 May 2006, 14:44 GMT 15:44 UK
Dealing with tax credit overpayments
By Anne Redston
Chair of Personal Taxes Sub-committee, Chartered Institute of Taxation

A person with some bills
Many people are having to repay their tax credits

The government's flagship tax credit system has been roundly criticised by the Parliamentary Ombudsman and Citizens Advice for administrative errors.

A leading tax expert explains your rights if HM Revenue & Customs (HMRC) asks you to repay a tax credit.

When, in April 2003, the government launched its revolutionary new tax credit system many families and campaign groups welcomed the step.

However, it has one unwelcome feature, never before seen in the benefit system: the overpayment.

This means many who received tax credits are being asked to repay part of the money they originally received.

Anyone who thinks they should not have to repay their overpayment should contact the HMRC, and ask for Form TC846

The Parliamentary Ombudsman and Citizens Advice have both shown clearly that reclaiming overpayments has forced some families into poverty.

In the past, the government only required benefits to be repaid where an individual had been economical with the truth. But with tax credits, overpayments are an intrinsic part of the system.

This is because tax credits are based on income for the previous tax year.

Overpayment rules

By 30 September, 2005, HMRC should have received details of your actual income for the year to 5 April, 2005.

The HMRC computers then churn away, comparing your actual income with the estimate on which your tax credit claim was based.

This is what happens next:

  • If your income in the year ended April 2005 was less than the estimate on which your tax credits were based, the HMRC will normally pay you the difference.
  • If the income was greater, but by 25,000 or less, the HMRC will not claim back any tax credits in that tax year.
  • If the difference is greater than this, then you will be expected to pay some back, probably over a period of time. This is likely to come as a shock to many low-income households.

Appealing decision

An overpayment should not have to be paid back if it was the result of the HMRC's mistake and the individual could reasonably have believed that the tax credits payments were correct.

This position is outlined in the HMRC's Code of Practice COP26 "What happens if we have paid you too much tax credit?".

For example, if you told HMRC that your daughter had left school and was now at work, and it didn't process this information to change your award, you should explain to HMRC that the overpayment was as a result of its error.

Anyone who thinks they should not have to repay their overpayment should contact the HMRC, and ask for Form TC846 "Request to reconsider recovery of tax credits". The form can be downloaded from the Revenue and the Chartered Institute of Taxation's websites.

Little is known about how successful these appeals have been.

In the past, HMRC has said it will deal with cases on an "individual basis" but it has recently announced streamlined procedures to enable them to deal with these cases more quickly.

One problem for tax credit recipients is they may not know if the overpayment required by the HMRC is right or not, because HMRC does not explain why they believe the overpayment has arisen.

If you don't know if the overpayment is correct, the only solution is to call the HMRC's Tax Credit helpline on 0845 300 3900. Your local Citizens Advice Bureau may also be able to help.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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