Exclusive: We know tax credits were overpaid. Now it's revealed the figure is £5.6bn

Money is clawed back from Britain's poor under new powers, even though cash was paid out after tax office miscalculations

SOCIAL AFFAIRS EDITOR

The debt owed to government after more than a decade of overpaying tax credits to some of Britain's poorest citizens has now reached more than £5.6bn. The startling figure comes as the tax office takes increasingly aggressive steps to claw back money that is often overpaid because of its own errors.

It plans to seize money from around 3,000 people's bank accounts a year for overpaid tax credits, according to figures released by HM Revenue and Customs (HMRC), in response to a Freedom of Information request by the campaign group False Economy.

Since tax credits go to those on lower incomes, and mistakes may not be discovered for a year or more, when an overpayment happens without the recipient realising, it can often be impossible for them to find the money to repay.

Tax credits are based on a family's estimated income for the coming year. Under the Labour government, households were allowed to earn an extra £25,000 before they had to pay money back. But in 2010 this buffer was gradually reduced to £5,000 by the coalition, meaning thousands of families are being chased for overpayment debts.

False Economy researcher Chaminda Jayanetti said: "These figures show that tax credit overpayments are just a state-created debt that many families can never pay off, caused by a combination of low pay, costly childcare, and government incompetence and sleight of hand. A personal debt burden of £5.6bn – more than £1bn of it dating back more than five years – has turned a system that was supposed to support parents into what is effectively a 'parent tax'."

He added: "Plans to enable HMRC to 'directly recover' this money from bank accounts will no doubt be expanded in time to cover more and more people who have been dragged into this spiral of fabricated debt."

Most of the working families affected are among Britain's poorest. More than half a million of the 4.7 million families being chased for debts have a taxable household income of less than £20,000. Of these, 118,000 earned less than £5,000.

The Independent revealed earlier this year that the Government has started using private debt collectors to chase overpaid tax credits, referring 215,144 cases to debt collection agencies in 2012/13 alone.

Working and child tax credits were brought in by Labour in 2003 for low-income families. Overpayment was a big issue at first, but was brought down to a low of 1.2 million cases in 2007. Since then, however, the number and cost of overpayments has risen each year.

The number of people going to Citizens Advice for help with debt created by overpaid tax credits soared by 14 per cent over the last tax year. The charity dealt with 29,366 problems relating to debts from overpaid child and working tax credits in the year to March 2014. Of these, 14,157 were people needing help to budget so they could repay money to HMRC, a 19 per cent rise on the previous tax year.

Citizens Advice chief executive, Gillian Guy, said: "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.

"Seeking to improve the accuracy of tax credit payments is sensible, but HMRC needs to tread carefully with its new powers to reclaim money from people's bank accounts. HMRC has a poor track record in managing people's data and dealing with overpayments. The safeguards look sensible 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."

Two years ago, Joanna Delooze, 50, got a letter chasing tax credit overpayments for four years, dating back to 2004, which came to £2,800. Ms Delooze has multiple sclerosis and is too ill to work, so she, her husband Michael, and their two teenage sons survive on benefits and Mr Delooze's income as a nurse.

After agreeing to pay back £50 a month, they discovered that more than £200 a month was already being seized from Mr Delooze's pay on a special tax code. "It was terrible. We had to borrow money off family for groceries for a couple of months. We couldn't afford the extra £50 a month in the first place and with an extra £200 or more it was impossible."

An HMRC spokesman said: "Tax credits overpayment debt represents just over 2 per cent of the £255bn that HMRC has paid out in tax credits since 2003.

"The majority of overpayments occur when customers fail to tell HMRC about a change in circumstance. HMRC will only recover overpayments where it is possible to do so. Furthermore, legislation prevents claimants being put into hardship. This means some debts can take longer than a year to be collected. Of the 4.6 million families who receive tax credits, only a small number of individuals will have accumulated more than £1,000 of debt so that they become eligible for Direct Recovery of Debts, and HMRC will always leave £5,000 behind."

Case study: 'The money was going into my ex-husband's bank'

Maureen Grosvenor, 56, is from Pudsey, West Yorkshire

"My husband left me in August 2012 and took his daughter – my stepdaughter, who was then 14 – with him. I hadn't been working, but we got tax credits in my name to pay for my stepdaughter. I didn't know that I had to notify HMRC after he left me because we didn't have a joint bank account and the money was going into his bank account. Then, in March last year I got a letter saying I owed £2,639 for the tax credits paid since he'd left. I was devastated and thought, 'There's no way I can pay that back', and I went to Citizens Advice. Now they've moved out I've also got to pay the bedroom tax and I thought, 'Why should I pay it back when it's gone into his bank account and I don't have it?' I pointed out that anybody could have checked the bank statements and seen it was going to him. I haven't received any letters from HMRC since."

What £5.6bn could buy

* More than 18,600 full-time food banks for 10 years

* Free meals for a year for 6.8 million people

* Childcare for 40 hours a week for 700,000 children for a year

* Free school uniforms for every child once a year for 20 years

* A one-off payment of £430 to the 13 million people living in poverty

* A 54 per cent increase in the UK's foreign aid budget.

* A tablet computer for 11 million people

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