HMRC’s use of debt collection agencies (DCAs) to collect overpaid tax credits has been criticised by the campaigning group False Economy and the charity Citizens Advice, which claim thousands of people are in debt as a result of errors by the tax office.
According to data obtained through Freedom of Information (FoI) requests made by False Economy, HMRC made 215,144 referrals to debt collection agencies in 2013-14 to ‘secure direct recovery of overpaid personal tax credits'.
The group says that in many cases it has investigated, the overpayment is due to an HMRC error in calculation and since the families involved are already living on very low incomes it is hard for them to pay back the accumulated sums.
HMRC data suggests there are around 4.7m outstanding cases of overpayment of tax credits amounting to £1.6bn.
The tax authority has hired at least 12 private debt collectors to pursue tax credits, according to the FoI request, who phone, text and write to those who owe money. False Economy says that in at least 80 tax credit cases, assets have been seized directly.
Chaminda Jayanetti, a False Economy researcher said: ‘Millions of people are hit by a system that persecutes people with trumped-up demands for money they don’t have, creating heavy debts where none existed, effectively indenturing them while private debt collectors circle like sharks.’
Separate research from Citizens Advice reveals a 19% rise over the past year in the number of people falling into debt as a result of repaying overpaid tax credits. In the 2013/14 tax year, the charity dealt with 29,366 problems relating to debts from overpaid child and working tax credits, 14,157 of which were about helping those affected to budget effectively in order to make repayments.
Gillian Guy, Citizens Advice chief executive, 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.’
Citizens Advice said the complexity of the tax credits system was causing difficulties for many people, while it also highlighted concerns over HMRC’s proposals to be given the power to recoup tax owing directly from an individual’s bank account.
‘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,’ Guy said.
An HMRC spokesman said: ‘Over and underpayments have always been a consequence of the tax credits system as HMRC calculates awards based on the current information it holds. Many overpayments result from people failing to tell us about a change of circumstances as soon as possible, so customers should tell us of any changes straight away.’
The spokesman also said ‘the use of DCAs is an established cost effective part of our normal debt collection operations. All that these agencies do is issue letters, issue SMS text messages and make phone calls to HMRC customers. The debt collection agencies we use adhere to highest customer service standards in line with the Office of Fair Trading’s code of practice and our own customer charter.’