The two forms of tax credits are:
Child tax credits. This is a payment to support families with children. A claimant does not have to be working to claim child tax credits.
Working tax credits. This is a payment to supplement the income of low paid working people (both employees and the self employed) including those who do not have children.
For married couples, civil partners and co-habiting couples a joint claim must be made. The credits are means tested, and are awarded for up to a year, and after the first application HMRC will send a renewal notice to the claimant(s) on an annual basis.
Tax credits are initially calculated based on the claimant's current circumstances and income in the previous tax year. There are quite complicated rules concerning when a claimant must notify HMRC of any change in circumstance or income.
From April 2006, all tax credits are paid by HMRC by direct debit into the claimants' bank account. HMRC can request payment of overpaid credits by a direct payment, or can reduce or stop future credits awarded in order to reclaim an overpayment.
In certain circumstances a tax credit may be overpaid and thereafter a recovery may be sought by HMRC. That recovery may be achieved by deductions made from ongoing awards of tax credits or by direct collection where there is no ongoing award of tax credits or where the ongoing award has ceased.
Where tax credits have been overpaid and a bankruptcy order is subsequently made against the claimant, whether or not the overpayment is a provable debt in the bankruptcy depends on the circumstances of the case as follows:
Final award notice (of repayment) issued before the date of the bankruptcy order.
If the recovery is made, or would have been made, by direct collection (in cases where there is no ongoing award of tax credits), HMRC will submit a proof of debt in the bankruptcy, considering the debt to be a provable one.
If the recovery is made, or would propose to have been made, by deductions from ongoing awards of tax credits, HMRC will not submit a proof of debt in the bankruptcy but will continue to make the collections from the ongoing award of tax credits until the bankrupt’s discharge from bankruptcy. Thereafter the balance of the debt will be written off. This action, of continuing to recover the debt post bankruptcy, follows the decision in the case of R v Secretary of State for Social Security, Ex Parte Taylor and Chapman [note 1] which provided that where a bankrupt was indebted to the Secretary of State for Social Security in respect of debts arising from earlier receipts of social security benefits, he/she was entitled to deduct sums from future benefits to be received thereafter in reduction of that indebtedness. Should any bankrupt object to the taking of the ongoing recovery action by HMRC in this way, they should be referred to that Department without further comment by the official receiver.
In all cases where a final award notice (of repayment) has been issued by HMRC before the date of the bankruptcy order, the debt should be added to the list of creditors and HMRC treated by the official receiver as a creditor in the usual way.
Final award notice (of repayment) issued after the date of the bankruptcy order.
Where a final award notice (of repayment) is issued by HMRC after the date of a bankruptcy order, whether the recovery action be considered by direct collection or from the ongoing award of tax credits, the bankrupt will be pursued by HMRC in the usual way even though the over-paid tax credits arose before the date of the bankruptcy order. This follows the decision in R (on the application of David William Steele) v Secretary of State for Work and Pensions [note 2]. In these circumstances the debt will not be included in the list of creditors. See also Chapter 40 Part 6 - Creditors and liabilities.
Should the official receiver require information on how HMRC intends to treat tax credit overpayments in individual voluntary arrangements, the official receiver should contact Technical Section directly for this information.
Where appropriate, HMRC will claim set-off in respect of monies it owes to the bankrupt to reduce or extinguish the indebtedness for overpaid tax credits [note 3].
Where tax credits have been claimed by two persons, HMRC will pursue the non-bankrupt person, if any, to recover the overpayment and if the intended recovery procedure is direct collection, it will also submit a proof of debt in the bankruptcy (as appropriate) (see paragraph 77.50), but it will not recover more than 100p in the £ of its debt (from both sources). Where the intended recovery action is deductions from ongoing tax credits, that will continue as far as the non-bankrupt claimant is concerned but a proof of debt will not be submitted in the bankruptcy. This follows an operational decision made by HMRC.
There should be no need for official receivers to contact the Tax Credits Office of HMRC directly. Claims to be submitted in bankruptcy cases will be prepared and lodged by the Insolvency Claims Handling Unit (ICHU) in Newcastle upon Tyne (see paragraph 77.73). ICHU co-ordinates and assembles claims to be lodged in insolvencies for the majority of the taxes formerly collected by the Inland Revenue. Where a bankrupt has listed the Tax Credits Office on a statement of affairs or similar creditors’ details, any correspondence regarding that debt should be sent to the ICHU using party ID 100258263, via the email address listed in the Partnership Agreement, Appendix A on the ORBS intranet site.