Jane Millar is Professor of Social Policy at the University of Bath Department of Social and Policy Sciences and IPR. Peter Whiteford is a Professor in the Crawford School of Public Policy at the Australian National University, and a Visiting Fellow at the Institute for Policy Research (IPR) at the University of Bath.
The roll-out of Universal Credit in the UK continues, and continues to uncover new challenges and problems. The recovery of overpayments – and especially overpayments of tax credits - is starting to emerge as one of these possibly large and destabilising challenges. Although Universal Credit is intended to replace the so-called ‘legacy’ system, in practice it seems it is not quite so easy to leave behind, as millions of people are, or will be, finding out.
There are currently just over two million people receiving Universal Credit, and approximately three-quarters of a million Universal Credit recipients have already had deductions from their Universal Credit award for the repayment of non-Universal Credit debt. The vast majority of this refers to the recovery of tax credit overpayments.
At April 2019, there were 570,000 claimants of Universal Credit repaying tax credit overpayments through Universal Credit. For those with a deduction to repay a debt the mean and median outstanding tax credit debt was £1,560 and £610 respectively. The Department of Work and Pensions (DWP) recovered almost £95 million worth of tax credit overpayments from Universal Credit claimants in 2018/19, with another £635 million outstanding. But much more is to come, with DWP set to inherit a further £5.9 billion of tax credit debt from HMRC as part of the Universal Credit managed migration process. This is an unwelcome hangover from the legacy system, which may take some time to sort out, and may further undermine support for managed migration, which is already looking shaky.
Where do these overpayments come from? In our previous ‘timing it wrong’ blog, published in 2017, we looked at the way in which Australia and the UK had designed parts of their social security system (family payments in Australia and tax credits in the UK) on the basis of ‘pay now, reconcile later’. In Australia, claimants were asked to estimate their income for the coming year, were paid on that basis, and the amount reconciled with actual income at the end of the year. In the UK, the initial assessment was based on tax records of earnings in the previous year, awards were paid on that basis, and the amount reconciled with actual income at the end of the year.
Both systems – prospective and retrospective income estimates – meant that overpayments and underpayments were inevitable. And overpayments were, in both systems, much more common than underpayments. In Australia, people tended to under-estimate their future incomes. In the UK, there were found to be so many changes in income and circumstances during the year that previous earnings were a poor guide. These systems proved to be very unpopular, with much focus on the hardship caused to families being asked to pay some large - and often unexpected - debts.
The impact of overpayments was reduced in Australia initially through partial debt waivers, then through the introduction of end-of-year additional lump sum payments that were used to offset the debts. In the UK a substantial disregard was introduced, increasing the amount by which income could rise before awards were reduced. The initial disregard was £2,500 per year, but between 2006 and 2011 it was set at £25,000 per year, which led to a substantial fall in overpayments. Between 2003/04 and 2008/09, overpayments fell by about half, from £1.9 billion to £0.9 billion. However as noted above, the DWP will inherit almost £6 billion in tax credit overpayments. Why so much? There are two main reasons.
The first is that, since 2011, the disregard level has been steadily reduced, following the 2010 Emergency Budget, which was the start of the austerity cuts to benefits. The disregard was reduced to £10,000 from April 2011, to £5,000 from April 2013, and then to the original level of £2,500 from April 2016. Thus overpayments are now back almost at original levels, at £1.6 billion in 2016/17.
Second, it seems that in recent years, HM Revenue and Customs (HMRC) has not been particularly focused or proactive in seeking to reduce overpayments or speed up recovery. The House of Commons Public Accounts Committee (2018) took HMRC to task on fraud and error targets (which includes overpayments) noting that these were not falling and indeed were projected to rise. The HMRC position was telling:
‘... as Tax Credits are being replaced by Universal Credit, they “are not a permanent feature of the landscape”, and therefore the appetite within government to change existing systems and processes is very low … HMRC confirmed that it was not proceeding with some transformation projects that would have helped people claim Tax Credits and notify HMRC of changes of circumstances which affect their entitlement to Tax Credits’ (page 9).
Thus, as the July 2019 All-Party Parliamentary Group on Universal Credit report noted, the tax credit debt to be transferred to DWP includes many ‘historic case of overpayments with … 52% related to 2011/12 to 2015/16 and 16% even older. Therefore, many people aren’t aware they even have an overpayment and aren’t given the opportunity to challenge them’. This particular consequence of the legacy system is probably unwelcome to the DWP and, according to the National Audit Office, the DWP ‘is developing proposals with HMRC on what remaining debt from past claims should or should not transfer’.
The system for ‘cross-claim recovery’ means that both HMRC and DWP can recover these overpayment debts from old claims that have ended. This is possible in part due to enhanced computer capability. However the automatic pick-up of old debts through data-matching has proved to be a very controversial issue in Australia, as we discussed in our previous blog.
In addition to old tax credit overpayments, it is also the case that overpayments are very likely to be generated at the point of transfer from tax credits to Universal Credit. This is true in respect of both of natural and managed migration. Under natural migration, entitlement to tax credits automatically ends the day that a claim is made for Universal Credit. Some claimants will receive a final tax credit payment after the Universal Credit claim is live but before they receive any Universal Credit (which takes at least 5 weeks). This may help them bridge the gap in income between the two systems, but it is an overpayment which must be repaid.
Under managed migration, due to be piloted in 2019 and rolled out from 2020 to 2023, the tax credit claim will also end when a new claim is made for Universal Credit. But there will also need to be a balancing assessment, like the year-end reconciliation, to ensure that tax credit payments are correct for that year to date. So some people – possibly most ex-tax credit recipients - will arrive on Universal Credit with tax credit repayments to be deducted.
The government overpayment guidance says:
‘After you start getting Universal Credit you’ll get a letter from HM Revenue and Customs (HMRC) telling you how much you owe. The letter is called a ‘TC1131 (UC)’. The letter may come a few months after you’ve moved to Universal Credit… After you get the letter, the Department for Work and Pensions (DWP) will reduce your Universal Credit payments until you pay back the money you owe. You do not have to do anything to set this up … If you are repaying tax credits overpayments from different years, you may get more than one letter - you must repay each of these debts’.
For some claimants, this will add a further element of uncertainty about how much Universal Credit they will actually receive.
Overpayments, debts and deductions
The DWP is clear that there is a public duty obligation to recover overpayments. In 2018/19, about 16,000 people applied for a reduction in repayment rates (all overpayments, not just tax credit debts) and almost all were successful in getting some reduction. But debts were rarely (in only ten cases) waived in full or in part because:
‘The Department has an obligation to ensure that public funds are administered responsibly and to abide by the principles set out in Her Majesty’s Treasury’s guidance on Managing Public Money … Waivers are only granted in limited circumstances including where the recovery of an overpayment is causing substantial financial and/or medical hardship and clear supporting evidence of this is provided.’
The principle – that people should not receive public money payments to which they are not entitled – is sound and most people would agree with it. (Although many benefits have long had less than full take-up rates, suggesting that we do not necessarily hold strongly to the corollary, i.e. that people should always receive the public money to which they are entitled.)
But the past use of disregards shows that not all overpayments need necessarily be defined as debts. Some, or all, of the tax credit overpayments could be waived. This is a policy decision, which could be justified on the grounds of past precedent, on the importance of reducing uncertainty for claimants in a system that is already difficult to understand and navigate for many, and in order to reduce the risk of hardship. Such a move might also restore some trust in DWP, much needed in the light of so much negative publicity surrounding Universal Credit.
But perhaps what is needed is a wider look at deductions from Universal Credit. As well as tax credit overpayments, there are also a number of other deductions that can be applied. This includes other benefit overpayments and deductions for the repayment of advance payments and hardship payments. Some creditors - landlords, utility companies, and local councils - can apply for recovery of debts through third party deductions. The maximum amount that can be deducted from Universal Credit is 40% of the standard allowance (to be reduced to 30% from October 2019), although this can be higher in some circumstances.
The All-Party Parliamentary Group on Universal Credit shows that ‘of all the eligible claims of Universal Credit due a payment in February 2019, 57% (840,000 claims) had a deduction. Of these 13,000 had deductions above 40% of their standard allowance’. In May 2019, 440,000 households claiming Universal Credit also had at least one other debt relating to benefit overpayments, social fund loans or previous advances. This does not include debts such a rent arrears, utility bills or council tax debt. There is thus increasing concern about the ways in which Universal Credit is increasing the risk of debt, as discussed in a recent House of Commons Library briefing, and in the House of Commons debate in June 2019.
The All-Party Parliamentary Group recommends waiving overpayments that are the result of DWP error, introducing a Code of Practice for overpayments, and basing debt repayment deductions on an assessment of affordability. The Treasury has been consulting on the proposed implementation of a breathing space to give people in problem debt the chance to get advice and develop a debt solution plan, and the application of this to benefit debts is under discussion. But prevention is better than cure, and Universal Credit not adding to debt problems would be a start.