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HMRC website (link opens in a new window)Tax credits: change of circumstances, compliance checks and overpayments

It is important that tax credit claimants make sure that they let HM Revenue and Customs (HMRC) know of any change in their circumstances that might affect their claim – e.g. splitting up with their partner or moving in with a new one. This is to ensure that the correct amount of money is being paid and to avoid compliance checks and overpayments.

If you are advising anyone about tax credits, you should also be aware of the following information.

HMRC investigations and credit agency checks

HMRC routinely collects information from credit reference agencies for data matching against tax credit claims.
Where data matching information shows, for example, that a person has applied for a loan or a credit card from an address where another person is claiming tax credits as a lone parent, that could trigger an HMRC investigation into whether the tax credit recipient has an undeclared partner living with them.

Compliance checks

Compliance checks are done to check that the right amount of tax credits are being paid, particularly there has been a change in circumstances – for instance when a lone parent is late in telling HMRC about a new partner moving in or couples who have been making a joint claim fail to inform them that they have separated. In such cases, where a new claim needs to be made as a single person or as part of a new couple, reporting the change late can result in a tax credit overpayment.

HMRC may suspend payment of tax credits during a compliance check.

Advisers who deal with tax credit problems will be aware of the difficulties clients can have if their award is subject to a compliance check. It is often very difficult to assist them when compliance teams are involved and a long investigation can cause considerable hardship.

Offsetting notional entitlement

Where HMRC decides that a person’s award has been incorrect, for example where they discover that a lone parent has been living with a partner, they will reassess the tax credits award on the correct basis. They may also treat any amounts already paid on the previous claim as an overpayment.

In many cases, when HMRC calculate the amount overpaid, they will take into account the amount the person should have received, had the award been correctly assessed. HMRC call this process ‘offsetting notional entitlement’. 

For example, if someone was paid £5,000 in tax credits on their original claim as a lone parent, the whole of this amount may be considered as an overpayment if they are subject to a compliance check and found to have been paid the wrong amount. However, if they are entitled to £3,000 on their new claim as part of a couple, the overpayment can be reduced to £2,000.

HMRC guidance says that offsetting notional entitlement should be possible in most cases, except when HMRC believe the claimant was deliberately dishonest.

It is very important to make sure that HMRC do consider offsetting notional entitlement when appropriate, as the difference between the amount overpaid and notional entitlement may be comparatively small. However if offsetting of notional entitlement is not allowed, all tax credits paid from the incorrect award will need to be paid back.

The Tax Credit Helpline (link opens in a new window) can advise further

See the HMRC website for official guidance on when offsetting should be allowed (link opens in a new window).

Vulnerable clients

HMRC does have a special procedure for vulnerable clients - for example, where domestic violence is involved - and has promised to provide information about this procedure to advice agencies. We will let you know in a future edition of Turn2us News when we get further details about this.

New Turn2us overpayments and fraud information sections - coming soon

Next month, Turn2us will shortly be publishing new information sections on Overpayments and Fraud investigations in relation to benefits and tax credits.

See the HMRC website for general information on tax credit overpayments

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