'Sharp' rise in debt problems from overpaid tax credits

There has been a sharp rise in debt problems caused by tax credit overpayments, Citizens Advice has said.

The charity says that in the year to March there was a 14% increase in the numbers getting into financial difficulty, as a result of having to pay the money back.

But HM Revenue and Customs (HMRC) has denied that people are being harassed to repay what they owe.

The overpayments happen when people's income rises unexpectedly.

They are then asked to pay back money they have received from Child or Working Tax Credits.

Adverse impact

In some cases people have been asked to repay £7,000, after their circumstances changed.

Maureen Grosvenor was asked to repay £2,600 in tax credits, after her husband left her. HMRC admitted it had made a mistake, and eventually cancelled the demand.

But the experience was very stressful.

"I was devastated. I was depressed," she told the BBC.

"I couldn't afford to pay them back. I thought they were going to have to send me to prison," she said.

Citizens Advice said it handled nearly 30,000 such cases last year.

"For thousands of families, Whitehall calculations are leading to household debt," said Gillian Guy, the chief executive of Citizens Advice.

"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."

In total, more than £1.5bn was overpaid to claimants in the year 2012-13.

'Unfair'

But HMRC has hit back at the claims, saying underpayments and overpayments are a necessary part of the system.

Releasing new figures, it said there were 1.5 million overpayments in 2012-13, down from 1.6 million the previous year.

It said it was targeting people who refuse to pay the money back, after being asked repeatedly to do so.

"Most people pay their taxes on time, but a minority do not, and some refuse to engage with us at all," said a spokesman.

"It is wrong that this should hand an advantage to those who simply dodge their obligations, and it is unfair on the vast majority who pay their taxes in full and on time," he said.

HMRC now uses private debt collection agencies to help recover the tax credits it is owed. Last year, it made 215,000 such referrals.

People who owe money are sent text messages and called on the phone, but are not visited by bailiffs.

From 2015, HMRC will be given the power to take money directly from people's bank accounts, providing they are left with £5,000 in the account.

It's thought that around 17,000 people could be affected by the new powers.