By Victoria Todd
Low Incomes Tax Reform Group
Tax credits were first seen in the UK in April 2003
Much of the success of tax credits in helping families has been largely overshadowed by the problem of tax credit overpayments.
Tax credits were introduced in April 2003 and are administered by HM Revenue and Customs (HMRC).
Many tax credit claimants will be surprised to find out that overpayments are a naturally-occurring part of the system and were built into the design.
This means that even if a claimant, and HMRC, does everything correctly, they can still be overpaid.
Overpayments in these circumstances normally have to be repaid, but HMRC can use its discretion not to recover them if the claimant is in hardship.
Error or delay
Many overpayments are caused by error or delay. The sheer complexity of the system means that claimants can make mistakes which lead to overpayments, but often HMRC make the errors that lead to overpayments.
Delays by claimants in reporting changes, or by HMRC in processing them, can also lead to overpayments.
It is likely that most tax credit claimants will be overpaid at some point, but it is not always easy to tell whether you have been overpaid.
Some claimants will have their continuing tax credit payments reduced to pay back an overpayment and this is often the first sign that anything is wrong.
Any overpayment should be set out on the award notice that is sent to you, although it is often difficult to understand.
Alternatively, if you no longer claim tax credits, or the overpayment is from an old claim, HMRC will write to you asking you to pay back the overpayment.
After the initial shock of reading what is in the brown envelope, the first question most claimants ask is: "Why do I have an overpayment?".
Unfortunately, this can be one of the most difficult questions to answer, partly because the overpayments can go back several years and partly because the system itself is very complicated.
If you are overpaid, what can you do?
You can ask HMRC for an explanation of how your overpayment occurred, but doing so comes with a warning. HMRC will keep demanding the money, even if you have asked for an explanation.
For that reason, some claimants will often benefit from "appealing" against the overpayment or "disputing" it - or both - at the same time as they ask for an explanation, as this stops the repayment demands from coming.
However, assuming you have already received an explanation you need to decide whether to accept it or whether you should appeal or dispute, or do both.
If you are in any doubt it is best to do both. Appeals eventually lead to an independent tribunal and are subject to strict time limits, whereas disputes are decided by HMRC and do not carry time limits.
Appeal or dispute
The difference between an appeal and dispute is often confusing for claimants and HMRC often get the distinction wrong themselves.
You have a right of appeal against the amount of tax credits you have been awarded. If this is incorrect, substituting the right figure can result in the overpayment decreasing or disappearing altogether.
For example, if HMRC remove one of your children by mistake from your claim at the end of the year and think they have overpaid you by paying you through the year for three children instead of two, you can appeal and have your award corrected. The overpayment will then disappear.
If you have in fact been overpaid and you agree with the amount charged, you will probably want to use the dispute route. This is because you think the overpayment happened due to an HMRC error and it wasn't your fault.
If you can show that you did everything right, the overpayment will still stand, but HMRC will agree that you do not have to pay it back. You can also use the dispute procedure if you feel that you cannot afford to repay the overpayment without experiencing hardship.
Paying it back
What happens if HMRC still say you have to pay the money back?
All is not lost, as you can ask HMRC to pay it back over a longer period or reduce the amount you are paying back. If you are left in hardship because of paying back the overpayment, you can ask HMRC to stop collecting it altogether.
If you are unhappy about how you have been treated by HMRC, you may also want to use the complaints procedure.
The tax credit system is exceptionally complicated and this article has only briefly touched on the remedies that are available to someone with an overpayment.
The Low Incomes Tax Reform Group (LITRG) has written a detailed guide designed for claimants to help them find out why they have been overpaid, what can be done about it, how to write a dispute letter and how to negotiate repayment.
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.