I have a client who is being asked to repay £6000 in overpaid tax credits and they have dramatically reduced his payments on those grounds. By an unfortunate coincidence he is also petitioning for bankruptcy (self- employed, business failed).

If he were to include the debt to our friends in the revenue along with all the others in his bankruptcy would they then be effectively written off and if so would the revenue have to resume paying him at the correct rate for his income and family circumstances.

This might be an obvious one to all of you who do debt work, if so i apologise in advance. i havn't done that type of work for some years and i just can't remember if debts to the revenue are in some way different to other creditors.

thanks pete

Someone will correct me if I'm wrong, but I think the situation is respect of Tax Credits is unclear. So far as DWP benefits are concerned there was a Court case last year - R (Steele) v Birmingham City Council & S of S Work & Pensions - which decided that if the overpayment arose before the bankruptcy and the decision to recover was made during the bankruptcy then the overpayment could be recovered by deduction from ongoing benefit until the discharge from bankruptcy but not after (i.e. the rest of it was wiped out). The case also logically means (but did not decide because there were no relevant debts) that the same applies to an overpayment before bankruptcy where the recovery decision is also taken before bankruptcy. DWP are appealing the decision and I think there is a view that it is likely to be overturned.
So far as I am aware, it is not known whether this decision affects Tax Credits, which come under quite different legislation, and I am not aware of any specific legal provisions in bankruptcy law about tax credits. Income tax debts are written off in bankruptcy in the same way as other unsecured debts.
I think your client must include the tax credit debt on his bankruptcy form, which has to include ALL his debts. Perhaps his Official Receiver will be able to clarify the position.
Incidentally, is the overpayment an 05-06 one? If it is an earlier year should the recovery not be limited to 25% under COP26?

re the steele case ... in november/december issue of the adviser ... it says that the dwp's appeal was due to be heard in december 2005 ... not seen the judgment yet though

see http://www.rightsnet.org.uk/dc/dcboard.php?az=show_topic&forum=108&topic_id=983&mode=full

Hi Shawn,
Thanks for your reply,vry interesting

pete

Hi

The Steele case has now been heard in the Court of Appeal – I have emailed a digest of the decision to Shawn who will post it shortly.

Despite the decision I think the situation for tax credits still remains unclear and raises the following questions.


1. In Steele the claimant was declared bankrupt before a determination was made in relation to his Overpayment. Therefore there was no present or future liability to pay within the meaning of Section 382 Insolvency Act. Would this mean that if this situation was reversed (i.e. the overpayment was determined under s.71 SSAA 1992 before the claimant is adjudicated bankrupt) the high court decision would still stand in relation to overpayments which are current or contingent debts at the date of bankruptcy?


2. The Court of Appeal said that the overpayment has to be determined as at the date of bankruptcy. In this case s.71 SSAA 1992 was relevant so this meant that the Secretary of State had to be satisfied there was misrepresentation or an omission. The question therefore exists as to what point a tax credit o/p exists for this purpose. Possibly for an end of year o/p this would mean HMRC are satisfied that “the amount of tax credit paid…exceeds the amount of tax credit to which is entitled” (section 28(1) TCA)…

3. What is the status of an overpayment (or its recovery) which is challenged – At what point is that determined for the purposes of bankruptcy? Would it be at the date the notice of the overpayment is given or when the appeal/dispute is settled?

I imagine that HMRC guidance will be issued in light of this decision that will answer some of these questions.


Victoria

thanks to victoria .... summary available here .......

http://www.rightsnet.org.uk/pdfs/Steele_summ_Feb_2006.doc

Victoria:
Thanks for this.

I expect someone with more knowledge will shoot me down on this, but the whole Court process seems to leave open the question of DWP benefit overpayments where the S 71 determination was made before the bankruptcy. The extract from S 382 seems to my non-legal mind to mean such a debt should be included in the bankruptcy in the absence of any explicit legislation excluding it.

On the face of it, the same could occur with overpaid tax credits, provided the queries you raise are clarified. But the position with these seems more complex. S 71 refers to misrepresentation or omission by the claimant, but with tax credits a large number of overpayments result from official error where TCO consider the claimant could reasonably have been expected to know TCO had got it wrong and tell them. In my view these should be prime candidates to be included in a bankruptcy, whatever happens to the misrepresentation and omission ones.

Hi

I may be wrong, but I cannot find the equivalent of S71 in the Tax Credits Act. S29 treats overpayments as a tax issue and recovery and subsequent issues of its status in bankruptcy is totally within HMRC. So, overpayements will be treated in Bankruptcy Just to let you know, though, we have the same ambiguous position about benefitts and bankruptcy in Scotland but trying to get a test case is proving very difficult.

yogiberra:

Thank you - I hadn't seen S29 before. Also I've never seen any notice from TCO specifying that section & the relevant subsection in relation to an overpayment recovery demand. Do TCO actually issue such notices? Has anyone else seen them?

From S.29 and what you say, it seems as if an overpayment coming under subsection 3 or 5 would be treated in bankruptcy in the same way as income tax (i.e. it would be written off) but I'm not so sure about subsection 4 - where the overpayment is to be recovered from ongoing entitlement to TCs. I don't know of any equivalent to this for income tax and wonder whether there may be a questionmark over what would happen in bankruptcy. Have you any further thoughts on it please?

Hi

Subsection 4 could either be a means of enabling recovery by deductions but if there is no recoverable debt because it would make them a preferential creditor, then maybe it is just an administrative clause, as opposed to s71 which says the SoS shall recover, which makes it an obligation on the SoS to recover. I guess that the only thing that you can do is get tax folk to quote their authority for recovering and then work back from there.