The Low Incomes Tax Reform Group (LITRG) is warning those with outstanding tax credit debts that they risk having the money recouped forcibly from their wages. This follows the transfer of some tax credit debts from HMRC to the DWP. LITRG is urging people not to ignore any letter received recently from HMRC about tax credit debt and to speak to a welfare rights adviser or contact either HMRC or DWP.
Victoria Todd, Head of the LITRG Team, said:
“How some tax credit debts are collected is changing. This could affect you if you no longer receive tax credits and have an outstanding tax credit overpayment. Do not ignore any letter received from HMRC, DWP or the Northern Ireland Department for Communities (NI DfC) and take steps to get advice or contact the relevant government department that wrote to you.”
In 2017, the Government announced that they planned to transfer a segment of tax credits debt from HMRC to the DWP or, where applicable, the NI DfC. The debt – made up of outstanding tax credit overpayments – will be collected by DWP or NI DfC. HMRC expect to transfer around 600,000 outstanding tax credit debts to DWP or NI DfC. The transfer of debts to DWP started in June 2019.
The main driver for this change is that the DWP and NI DfC have different legal powers to HMRC; a key difference is that DWP (and NI DfC) can collect outstanding debts directly from an individual’s pay, using a direct earnings attachment (DEA), 1 without the need to first take the individual to court.
Victoria Todd said:
“This new approach may take people by surprise, especially where the debt is old and they have not had any contact from HMRC for some time. Tax credit overpayments are very common; many are built into the design of the tax credit system.
“You should have been notified that you had an overpayment on your final tax credit award for the relevant tax year. In our experience, many people struggle to understand the award notices and because such debts are usually recovered gradually from ongoing tax credit awards, any overpayment can go unnoticed for some time.
“Once a person stops claiming tax credits altogether, it can be a shock to find that they have a large overpayment debt. If you did not receive the final award notice or did not understand it, HMRC should have written to you when your tax credits ended to ask you to repay the debt directly – called a notice to pay. For most people, the time limits for challenging these overpayments will have passed.
“In some cases, it may be a number of years since you received any contact from HMRC about the debt but if you do not have repayment arrangements in place with HMRC, it could be swept up in this exercise.”2
Under the new debt transfer arrangements, HMRC will write to you if your debt is to be transferred to DWP (or NI DfC). The letter will state the amount of the outstanding debt and explain what will happen next. After the issue of the letter from HMRC, the DWP or NI DfC will contact you about your debt and give you at least 21 days to contact DWP (or NI DfC) to discuss repayment arrangements.
Crucially, after the 21-day period, DWP (or NI DfC) may decide to pursue recovery via a DEA. If they do, they will write to you and your employer about starting the DEA.
Victoria Todd said:
“If you cannot afford to repay the debt, you must discuss this with DWP or NI DfC when they contact you. You may need to tell them your household income and expenses. The most important thing is not to ignore any letters.”
Notes for editors
1. A direct earnings attachment, sometimes called an ‘attachment of earnings’, is a legal mechanism for collecting outstanding debts directly from earnings. It means a creditor (the person who is owed the debt) can require the debtor’s (the person who owes the debt) employer to take payments to repay the debt directly out of the debtor’s earnings. In most cases, direct earnings attachments are set-up through court arrangements but by law, DWP and NI DfC, can set up direct earnings attachments without having to go through court. The payments are taken from the earnings, after tax and NI has been deducted. Employers can also add a £1 administration charge to each payment that is taken. There are strict limits about the level of payments that can be directly taken out of earnings, although these are based on a percentage rate, not a fixed amount and there is a sliding rate which is related to the level of gross pay. In all cases, a minimum of 60 per cent of net earnings must be left for the individual. Detailed information about direct earnings attachments is available on GOV.UK website.
Transferring the outstanding tax credit debts to DWP or NI DfC for them to recover the money instead of HMRC allows them to use DEAs. However it is also in line with longer-term changes as HMRC very gradually reduce their tax credit operations as more and more people move over to universal credit (UC).
2. In England and Wales, the Limitation Act 1980 provides that recovery action for debts should commence within six years from the debt becoming payable. Tax debts are not covered by this law, but tax credit overpayment debts are in theory. In most cases, this prevents HMRC from taking County Court action but generally does not stop recovery from ongoing benefit awards. The law on whether this six-year rule applies is complex and so if you think it might apply you should seek legal and/or debt advice from a specialist.
3. LITRG’s more in-depth article about the risk of DEAs and tax credit can be found here.
4. Low Incomes Tax Reform Group
The LITRG is an initiative of the Chartered Institute of Taxation (CIOT) to give a voice to the unrepresented. Since 1998 LITRG has been working to improve the policy and processes of the tax, tax credits and associated welfare systems for the benefit of those on low incomes.
The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. The CIOT’s 18,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.
Contact: Hamant Verma, External Relations Officer, 0207 340 2702 HVerma@ciot.org.uk
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