HMRC tax credit reclaiming is pushing people into debt

Credit: SamJonah/Shutterstock.com

Citizens Advice said today that they saw a 14% increase in cases where Tax Credit debt was a major factor in the 2013/14 tax year.

The Government has started pursuing households that owe overpaid Tax Credits much more aggressively.

215,144 overpayment cases were referred to at least 12 outside debt collection agencies in 2013-14, documents released to The Independent through a Freedom of Information request reveal.

Later this year, HMRC will get new powers to dip into bank accounts to recover tax debts.

Hurting vulnerable households

"Tax Credits are there to make sure people get a decent standard of income, but the sharp rise in debts from overpaid tax credits suggests this policy is having the opposite effect," said Gillian Guy, Citizens Advice Chief Executive.

The actual number of people coming to Citizens Advice with problems relating to overpayment last year was fairly small.

The consumer advice service saw 29,366 cases relating to debts from overpaid Child and Working Tax Credits; in just the first three months of 2014, they saw about the same number of cases, 27,000, relating to council tax arrears.

However, households receiving Tax Credits are disproportionately financially vulnerable.

Overpayment most often occurs because beneficiaries didn't tell the tax office about changes to their circumstances or as a result of a mistake or slow processing on the part of the tax office.

When it's discovered HMRC usually give households the option to pay back the full amount in 30 days or spread out in monthly payments over 12 months.

They may also choose to change the beneficiary's tax code, if they are employed, to take the overpayment straight out of their pay packet or to reduce their future credit payments, usually by between 15 and 25%, until the full costs are recouped.

Either way, paying back Tax Credits can be a big financial burden for homes already on tight budgets.

Pressure on overpayments

Over the past few years, a series of new rules have upped the pressure on households that were overpaid credits.

For example, Tax Credits are based on estimated income for the coming year but in 2010 the buffer, the amount families could earn before having to overpay, was reduced from £25,000 to £5,000.

And from early 2013, households can be pursued for credit debt even if they are disputing the overpayment (though not when they appeal).

Now, increased use of debt collection agencies is becoming the source of even more pressure.

Recovery action on the rise

Recovery action should be the very last resort for HMRC.

The tax office says that it employs these outside agencies to pursue those with credit debt by phone, letter and text message.

But The Independent's investigation revealed that, in at least 80 cases, debt collectors had visited households in person.

Debt collection agencies have for years been a serious cause for concern, often making those they're pursuing feel scared, stressed and harassed.

New powers to take directly

However, new powers which will allow the HMRC to take money directly from people's bank accounts instead have also been criticised.

The Treasury Select Committee said this week that it could lead to money being taken mistakenly, or when it was needed by the debtor for priorities like rent or bills.

HMRC say the new powers will only target people with very long term debts and no money will be taken unless at least £5,000 is left in total across all the accounts of the person in debt.

But Gillian Guy cautioned that the protections may not be enough.

"The safeguards put in place look sensible on paper but with such huge pressure on household budgets, it does not take much to push families into financial trouble and mistakes by HMRC will be harmful.

"As the economy recovers and welfare reforms are phased in, ministers and Government agencies must ensure people trying to make ends meet are supported through the upheaval," she said.

According to official statistics there are about 4.7 million outstanding cases of overpayment of tax credits, amounting to £1.6 billion of taxpayers money.

The revenue took an extra £3.2 billion in the past tax year, largely by tackling avoidance schemes and criminals in the courts and taking more from large businesses.