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Robin Williamson of the Low Incomes Tax Reform Group ( http://www.litrg.org.uk/ ) reports on the approach of HMRC and the Courts to Tax Credit debts.

Introduction

A more aggressive stance by HMRC is leading to more tax credit debt being pursued in the courts. The courts sometimes may not realise that tax credit debt should be treated differently to ordinary tax debt.

The production by HMRC of a certificate of debt is not conclusive that a tax credit debt is due and unpaid, and the tax credit claimant may be able to use that to their advantage.

In recent years HMRC have been taking increasing numbers of tax credit claimants with overpayments to court to collect the alleged debt. Evidently in some cases claimants have not been given an opportunity to challenge the recovery of the overpayment or even explain that they didn’t understand why they had been overpaid.

The statutory position with tax debt

Tax credits, although considered by most to be a benefit, follow tax rules and as such overpayments are recoverable as though they were a tax debt. But not all tax debt has the same court procedure applied to it.

We have had reports that when HMRC produce a certificate of debt in relation to a tax credit overpayment, some courts have regarded that as conclusive evidence that the debt is due and unpaid.

The courts taking this approach seem to be attempting to follow an established court procedure (CPR PD7D) where “tax” debt cases have a special status and do not follow the normal allocation route for court cases.

The different position of tax credit debt

But critically CPR PD7D does not apply to tax credit overpayments. In fact it only applies to income tax, corporation tax, capital gains tax, national insurance contributions and some interest and penalty debts.

This means that tax credit cases should be subject to the court’s normal tracking system whereby a case is allocated to a specific track based on the amount of the debt.

So what difference does it make?  In broad terms a slower and more measured approach is taken if CPR PD7D does not apply. So, for example:

• the court does not set a hearing date immediately upon receipt of the defence;
• an allocation questionnaire needs to be completed so that the case can be allocated to the correct track;
• the case is very rarely decided at the first hearing.

So where tax credit overpayment cases are defended by claimants, HMRC should reply answering all of the points raised in their defence. According to HMRC, this should be done with the aim of settling the matter either before the hearing, or – if it cannot be resolved – assisting the court by focusing on the issues in dispute.

If the case is not resolved, the case goes to a pre-trial review. The pre-trial review is for the court to review the evidence – including, but not limited to, the certificate of debt – then to decide if there is a case to answer. Frequently both sides are asked for a witness statement and evidence in support.

The importance of this for tax credit claimants is that it forces HMRC to review the case once again and crucially to produce papers supporting how the overpayment arose. In many cases it has been shown that HMRC have not fully investigated the causes of overpayments that have arisen. A more detailed review has subsequently disclosed HMRC errors thus enabling the debt to be written off.

It is not entirely clear as yet just how far the courts will go in examining HMRC’s papers and whether they will consider the test under COP 26. Whilst we would still caution against letting an overpayment claim reach the county court, the clarification of the status of tax credit debt cases means that claimants have an opportunity to challenge aspects of HMRC’s case that they believe are wrong.