The tax credit system has been so poorly managed that one claimant was overpaid by more than £100,000, The Times can reveal.
Officials at HM Revenue & Customs (HMRC) oversaw the huge payouts over a number of years after incorrect information was logged about family income.
The claimant has since moved over to universal credit and has been subject to a “significant investigation” after staff realised the mistake.
The case has emerged as HMRC faces widespread criticism for the way it is trying to recoup some of the billions of pounds it has lost since 2003 by mistakenly overpaying recipients of tax credits.
An investigation by this newspaper revealed that hundreds of thousands of benefit claimants have had payments cut since January because they were overpaid tax credits as long as 17 years ago.
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Unlike the recipient of the six-figure overpayment, the vast majority of those who were overpaid could not have known that officials overestimated what they were entitled to. Many were overpaid small amounts in increments over many years and only found out about the errors when their universal credit accounts were cut in recent weeks.
Stephen Timms, Labour chairman of the work and pensions committee, led calls for HMRC to stop trying to claw back the money by penalising honest, struggling families during the pandemic.
“It is deeply unfair, particularly because in many cases they had never heard of these debts before, HMRC has never raised it,” he said. “They are putting people in an extraordinarily difficult situation when things are already very hard. It shouldn’t be happening. These reductions ought to be suspended until the pandemic is over.”
Tax credits, which were introduced two decades ago by Labour, are meant to top up wages for low earners to ensure that it never pays to be out of work. Those who are eligible submit evidence of their family income and officials work out what they are entitled to.
However, problems with assessments and delays in making adjustments when circumstances change have resulted in millions of claimants being overpaid.
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In response to a freedom of information request from The Times, HMRC revealed that the largest overpayment debt for one individual moving from tax credits to universal credit was between £100,000 and £150,000.
It stated: “Cases like these where substantial overpayments have arisen have been subject to significant compliance investigations. These examinations, sometimes across different government departments, identify multiple years where a customer had fraudulently or negligently declared incorrect information on which their entitlement was calculated.”
Fraudsters have been able to play the system by using tactics such as pretending not to live with their partner, failing to declare income, moving abroad and continuing to claim child tax credits and claiming for relatives who have died.
While HMRC has made some very large individual overpayments, only about 1 per cent of tax credit overpayment debts relate to penalties and interest due to fraud or negligence on the part of the claimant.
StepChange, the largest debt advice charity in Britain, said that almost one in five of its clients with government debts had been told they had been overpaid tax credits. Peter Tutton, head of policy, said: “Often deductions are imposed to repay this debt without proper regard to affordability and in ways that take people by surprise due to poor communication”
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Since January, 47,000 universal credit claimants a week have had payments cut because of historic tax credit overpayments. The average person on universal credit with this debt owes £1,560. Many have had significant cuts to payments that are far higher than the £20 uplift to universal credit introduced at the start of the pandemic.
Jane Tully, from the Money Advice Trust, said: “For people already struggling to make ends meet as a result of the pandemic, any reduction in universal credit payments will have a huge impact on their chances of covering essential costs and risks pushing people further into difficulty.”
Yesterday Sir Iain Duncan Smith, the former conservative leader who as work and pensions secretary was the architect of universal credit, described the enforcement tactics as a “major mistake” that was “causing profound difficulties”.
The total level of debt related to overpayment of tax credits, which were introduced by Gordon Brown, is estimated to be £6 billion.
Rates of fraud and error related to tax credits peaked at 9.7 per cent of claims in the 2003-04 financial year. HMRC’s most recent estimate of error and fraud, for 2018-19, is 4.9 per cent, which is less than a 5 per cent target set by ministers. Officials said that cases in which claimants had built up such significant amounts of debt “are extremely rare” and that the case involving the six figure overpayment was not necessarily fraudulent.
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HMRC and the Department for Work and Pensions said that claimants were sent multiple notifications about overpayments and most of these were a result of delays in claimants reporting changes in circumstances.
They said that safeguards were in place to ensure that deductions were manageable and that vulnerable people were supported, and claimants can ask for cuts to be suspended or to have the rate at which they pay them changed depending on their financial circumstances.
Deductions from universal credit standard allowance payments are capped at 25 per cent from this month, a reduction from a previous maximum of 30 per cent. It was reduced from 40 per cent in October 2019.
A government spokesman said: “We carefully balance our duty to the taxpayer to recover overpayments with our support for claimants.”
