160.A significant proportion of claimants who are repaying an Advance—52%, according to the Trussell Trust—are also repaying another government debt, the most common type of which are overpayments of other benefits. Of these, overpayments of tax credits are the most common, accounting for 58% of all benefit overpayments.
161.Nicholas Timmins, a senior fellow at the Institute for Government, estimates that the total level of tax credit debt stands at around £6 billion. In a letter to the Committee, Jesse Norman, the Financial Secretary to the Treasury, said that there is £4.8 billion of tax credit debt in HMRC, up to and including the 2019–20 tax year. On average, this debt is six years old. DWP’s most recent published data shows that, in April 2019, around 570,000 people claiming Universal Credit faced deductions from their monthly award to cover tax credit overpayments, with the mean average of outstanding tax credit debt standing at £1,560 per claimant.
162.The issue of outstanding tax credit debt stretches back to before Universal Credit was introduced. Because of the rising levels of tax credit debt in the early 2000s, the Government at the time increased the income disregard to £25,000 from 2006–07. The income disregard means that households could see their income increase by up to that amount over the course of a year without their tax credit entitlement being affected. Since 2010, however, the income disregard has been reduced: to £10,000 from April 2011, to £5,000 from April 2013, and £2,500 from April 2016. The value of overpayments has increased over this period, from £2.9 billion in 2008–09 to £4.1 billion in 2017–18.
163.As Nicholas Timmins explains, as a condition of Universal Credit proceeding, HM Treasury stipulated that tax credit overpayments should be clawed back through Universal Credit. The Financial Secretary told us that the decision to recover tax credit overpayments from people who have moved to Universal Credit through DWP has allowed for “a simpler customer journey”—removing the need for people on Universal Credit to interact with two departments instead of just one, and reducing the risk of dual recovery—and provides a simpler IT solution for both HMRC and DWP.
164.HMRC says that people are informed about any outstanding tax credit debt before moving to Universal Credit. The Financial Secretary said that people who receive an overpayment are informed of this at several points throughout the duration of their claim. If a person then makes a claim for Universal Credit, they will receive a notice informing them of the level of debt, and that it will be recovered through Universal Credit from then on. We heard evidence, however, suggesting that not everyone is told that they have outstanding tax credit debt before they move to Universal Credit. The Trussell Trust said that people may not be aware of these debts when they decide to take out an Advance:
A significant issue with government debt repayments is that claimants are often not informed about these until they transfer to Universal Credit. These debts can relate to payments received more than 15 years ago. This means that claimants are unaware of these further deductions when they agree to take the Advance Payment.
165.There is no simple solution to the issue of outstanding tax credit debt. Nicholas Timmins has explored the possibility of writing it off, highlighting that the value of this debt—just under £6 billion—is less than the total value of reduction in spending in the benefits system since 2010 (around £30 billion). The Centre for Social Justice recommends that debt that is over three years old (accounting for around 61% of tax credit debt) should be written off. In the consumer credit sector, which is regulated by the Financial Conduct Authority (FCA), debt that is over a certain number of years old is statute barred, meaning that it can no longer be recovered through court action (although the debt still technically exists). The interim Chief Executive of the FCA said in a letter to the Committee:
Claims for debts must be made within a prescribed period (generally six years in England, Wales and Northern Ireland and five in Scotland) otherwise the debt is statute barred. Our rules prevent firms from attempting to recover a debt if they have not been in contact with the customer during the limitation period.
166.Sir Iain Duncan Smith told us that tax credit debt can give people a “very difficult experience” when they move on to Universal Credit. He argued that these debts should be retained by HMRC, as the Department with responsibility for tax credits, and not recovered through Universal Credit. The Centre for Social Justice recommends that tax credit debt that is less than three years old should be retained by HMRC, that the rate of deductions should be first and foremost based on the claimant’s ability to pay, and that it should be capped at 10% of the monthly Universal Credit standard allowance.
167.HMRC maintains that recovering tax credit overpayments through people’s Universal Credit awards is the “least intrusive” method of recovery. We asked the Financial Secretary whether it would be possible for HMRC to retain responsibility for recovering tax credit debt from people who have moved to Universal Credit. He explained that, as the IT infrastructure was built on the premise that DWP would recover these debts, “there is currently no IT function in place to return any debt to HMRC”, and that to introduce one now would result in “significant cost”.
168.We also asked whether it would be feasible to write off all or part of the outstanding tax credit debt, such as debts that are over a certain age. HMRC estimates that writing off all of the debt would cost an additional £3.2 billion, although the Financial Secretary emphasised that HMRC does remit debt in some circumstances: it remitted £152 million of debts in 2018–19. HMRC maintains, however, that the majority of outstanding tax credit debt is collectable—that is, that people are willing and able to repay it—and that writing off debt that is over six years old “could set a precedent to the effect that paying tax was optional and so result in a significant loss to HMT”.
169.Repayments of tax credit overpayments can compound hardship for people who may already be struggling. The evidence that some people are left unaware of these debts, which can be several years old, until they make a claim for Universal Credit, is particularly concerning. Despite HMRC’s assurances that people are routinely informed of overpayments, the evidence we have heard suggests that there are gaps in how this is being communicated.
170.The recovery of Tax Credit debt from claimants’ Universal Credit awards clearly presents problems. However, the option of returning responsibility to HMRC now would be too challenging to deliver in practice. Instead, we recommend that DWP should continue to collect these debts, but that recovery should only begin when the claimant has repaid their Advance (if they have taken one out). Repayments of any remaining debt should be capped at 10% of the Universal Credit standard allowance per month. Debts that have not been pursued for more than 6 years should be written off entirely, in line with the approach taken in the private sector. We also recommend that the FCA’s approach be extended so that it covers public sector debts, including tax credit overpayments and Advances in Universal Credit. This will help ensure that best practice from the private sector is reflected in DWP’s approach to debt.
186 StepChange, , January 2020, p7
187 Nicholas Timmins, , February 2020, p17
188 from the Financial Secretary to the Treasury dated 2 September 2020
189 DWP, , 31 May 2019
190 Nicholas Timmins, , February 2020, p14
191 from the Financial Secretary to the Treasury dated 2 September 2020
193 Trussell Trust ()
194 Nicholas Timmins, , February 2020, p15
195 Centre for Social Justice, , April 2020, p64
196 Letter from the interim Chief Executive of the FCA dated 20 July 2020
197 Centre for Social Justice, , April 2020, pp15–16
198 from the Financial Secretary to the Treasury dated 2 September 2020
Published: 19 October 2020