The recent crackdown on tax credit overpayments is leading to some of Britain’s lowest-income families facing a sharp fall in their income, through no fault of their own. Deven Ghelani, Director and Founder of Policy in Practice and one of the architects of Universal Credit, spoke on LBC radio recently calling for older tax credit debt to be written off.

Given the amount of support needed to help people find their feet in the pandemic, the clawing back of tax credit overpayments is kicking people when they are down.

Deven Ghelani, Director and Founder of Policy in Practice

Listen to Deven speaking with Shelagh Fogarty, LBC Radio

Universal Credit is being used to paper over the failings of Tax Credits

The issue with tax credit overpayments goes back as far as 2003 when Working Tax Credit and Child Tax Credits were newly introduced. As the years have gone on, the problem has compounded.

Despite common misconceptions, tax credit overpayments are rarely to do with fraud and are most often caused by official error. In many cases, these families did not know they were being overpaid. The problem has gone unresolved for years and has been exacerbated by the pandemic.

Since the transition to Universal Credit, the job of collecting tax credit overpayments has passed from Her Majesty’s Revenue and Customs (HMRC) to the Department for Work and Pensions (DWP). The DWP, through Universal Credit, is much more effective at collecting overpayments, and since the number of people receiving Universal Credit has doubled to more than 6 million since the pandemic began, the issue with tax credit overpayments is affecting many more people than before.

An investigation by The Times found that:

“Since January, 47,000 Universal Credit claimants per week have had payments cut because of historic tax credit overpayments.

“Claimants also had £63 million deducted from their accounts for this reason between April and November last year.”

This means that families on the receiving end of the clawback are seeing significant cuts to their monthly income at a time when they are already financially struggling.

The impact of collecting tax credit overpayments on people

We published a blog post about one person’s journey through the welfare system and critiqued whether it has become easier for people to navigate.

The woman we featured, known as S, was paying £740 in rent. In 2017 her Housing Benefit fell to £625 per month due to a combination of higher earnings and overpayments, leaving her with a monthly shortfall with her rent of £115. However, S was only made aware of this when she received an arrears statement for £2,770 two years later.

S’ story speaks to the heart of the problem, namely that her overpayments have caused other issues. Not only is she now dealing with repaying her overpayments but she is also significantly in debt to her landlord.

The policy of deducting overpayments from Universal Credit will create or compound problems like this for people all over the country.

Policy in Practice’s recommendations for dealing with tax credit overpayments

Currently, HMRC is under no obligation to show evidence of these overpayments and  HMRC is authorised to go back further than other creditors, with statutory debts being limited to seven years.

As such, when people began to move onto Universal Credit in large numbers in 2015 and the scale of the tax credit overpayments issue became apparent, we recommended that the clawback be limited to overpayments in the last 2-3 years and only in cases where evidence would be produced.

We recommend that anything older than two years should be written off. Overpayments are not the claimant’s fault and are caused by the flawed design of tax credit. It’s a small sum in the context of other support for people impacted by the pandemic.

Alternatively, put the onus on HMRC to show the paper trail giving rise to the overpayment. We suggest that easy and routine access to the overpayment or individual assessment of repayments are allowed. At the moment, this is only carried out if the person can prove exceptional hardship, and proving this is very complex.

The pandemic means that many people on tax credits have lost their job and been forced to move onto Universal Credit. By continuing with the aggressive clawback of historic overpayments through Universal Credit the government is kicking people when they are down and undoing a lot of the good work done to support people during the pandemic.

Next steps

  1. Keep up to date with the story of S’s Universal Credit claim by subscribing to our monthly newsletter
  2. Read more about our work supporting councils in offering holistic support to people with multiple debts
  3. Join our next webinar, How housing providers can boost the income of tenants, on Wednesday 23 June. Details and register

Register for an upcoming webinar

TitleDateStart TimeDurationRegister
How Autumn’s income shocks will hit low income families The factors that have kept many low-income families out of poverty in the past year are changing, meaning many thousands will be worse off.

Families are set to be hit by big income shocks with the ending of furlough, the reintroduction of the Minimum Income Floor, the loss of the £20 a week Universal Credit increase and the ending of the Benefit Cap's grace period. New data analysis from Policy in Practice predicts significant losses for some families who will struggle to cope and who will need the support of frontline organisations to help them through.

In this webinar we will explore what the Autumn may bring for low-income households and how support organisations can work now to prevent hardship and prepare for an increased demand for services.

Join this webinar to learn:

- How much different households are set to lose when Covid supports are withdrawn
- What support tools are available for individuals and organisations
- Best practice advice from a frontline organisation

We will be joined by Monica Kaur from the Money and Pensions Service.
29/9/202110:30 BST1.3 hours
Register
How Kent County and district councils collaborate with data to tackle poverty Covid has turned our world upside down. Many residents in Kent, as elsewhere, have experienced financial hardship whilst, for organisations, the pandemic has been the catalyst energising them to work differently.

In summer 2020 Kent Districts and Communities Recovery Cell set up a group to focus support to residents at risk or already experiencing financial hardship because of the pandemic. Residents unused to facing financial hardship suddenly needed help to navigate support and advice systems. The group knew that things are likely to get worse for Kent's residents before they get better as furlough ends and families who were just about managing are tipped over the edge.

In a first for local government, Kent county and district councils have boldly chosen to collaboratively share their data to get powerful cross-county insights that will drive their poverty prevention activity. The information will help them to target of a wide range of campaigns to residents such as employment support, free school meal take-up, public health interventions, housing initiatives and benefits take up.

Importantly, the project has transparency built in so that councils can very easily benchmark with each other to identify and share best practice in a safe, collaborative way.

Join this webinar to hear:

- Kent County Council's vision for greater collaborative working with districts
- Maidstone District Council's drivers for districts to collaborate with their data
- Folkestone and Hythe District Council's impact achieved so far from data-led poverty prevention campaigns

We will be joined by guest speakers, Zena Cooke, Corporate Director Finance at Kent County Council, Steve McGinnes, Director of Mid Kent Services at Maidstone District Council, and Jane Worrel, Revenues and Benefits Senior Specialist at Folkestone and Hythe District Council.
20/10/202110:30 BST1.3 hours
Register
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