More families fall into debt with HMRC after tax credit overpayment soars

More families are in debt to HMRC through no fault of their own, according to Government data, which shows the proportion of tax credits that were overpaid soared last year.

The Independent revealed today that more than 200,000 of Britain’s poorest people are being targeted by private debt collectors hired by the Government after their tax credits were overpaid.

The number of families in receipt of tax credits fell from 5.6m to 4.6m between 2012 and 2013 because of more stringent eligibility criteria, according to the latest figures released by the Government. Despite this significant fall, the amount of debt owed because of overpayments only fell from £1.6bn to £1.5bn.

Almost 27 per cent of all tax credits were overpaid by HMRC in the financial year to 2013, according to the figures, up from 24 per cent the previous year.

False Economy researcher Chaminda Jayanetti said: “The growing zeal with which HMRC is pursuing overpayments, often on spurious grounds, reflects a Government bent on hounding people whose crime is raising children or working in the low-paid jobs that our economy is based on.

“The proportion of claims that have been hit with an overpayment has risen by a third in two years, taking this broken system back towards the chaos that greeted its birth. The Government's plan to let HMRC raid people's bank accounts should be viewed in this light.”

The number of people coming to Citizens Advice for help with debt created by overpaid tax credit has soared by 14 per cent in the last year.

In the last tax year, Citizens Advice dealt with 29,366 problems relating to debts from overpaid child and working tax credits. Of these, 14,157 were people needing help to budget effectively so they can repay money owed to HMRC, a 19 per cent increase on the previous tax year.

Citizens Advice chief executive, Gillian Guy, said: “For thousands of families, Whitehall calculations are leading to household debt. 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.

“Seeking to improve the accuracy of tax credit payments is sensible, but HMRC needs to tread carefully with its new powers to reclaim money directly from people’s bank accounts. HMRC has a poor track record in managing people’s data and dealing with overpayments.

“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.”

A spokeswoman for HMRC said “As a result of policy changes which came into effect in April 2012, tax credits overpayments have reduced as a proportion of money paid out. Overpayments fell from £1.6bn (5.4 per cent) in 2011/12 to £1.5 billion (five per cent) in 2012/13, out of around £30bn a year paid to 4.5m families. The figures published today also reveal that the number of awards that are overpaid fell by 70,000, from 1.62 million in 2011/12 to 1.55m in 2012-13.

“If an overpayment occurs as a result of HMRC’s error, claimants do not need to repay the overpaid money. An overpayment only needs to be repaid if a claimant has failed to meet their responsibilities in telling HMRC of any changes of circumstance.

“Where claimants have genuine difficulty in repaying an overpayment, we agree for them to pay in instalments through Time to Pay arrangements, and around two thirds of tax credits overpayments debt is currently being repaid in this way.”