Pursuit of tax credit overpayments turns nasty as debt collectors hound the poorest

Exclusive : Campaigners say families living below the breadline are being harassed by phone and text message for money they do not have

Hundreds of thousands of Britain’s poorest people are being targeted by private debt collectors hired by the Government after their tax credits were overpaid because of errors made by HMRC.

A joint investigation by The Independent and the campaign group False Economy has uncovered the Coalition’s increasingly forceful methods of pursuing more than 4.7 million cases of overpaid tax credits, which amount to debts of £1.6bn.

The hardline stance follows pledges by Iain Duncan Smith, the Work and Pensions Secretary, to bring down the benefits bill.

The debt collectors hired by HMRC  phone the people they are targeting on their mobiles, send them text messages and write to them at home. Some of those targeted say they feel harassed and frightened. In at least 80 tax credit cases, assets have been seized directly.

In total, HMRC made 215,144 referrals to debt collection agencies in 2013-14 to “secure direct recovery of overpaid personal tax credits”, according to data obtained through Freedom of Information requests. 

In many cases the overpayment is thanks to an HMRC error in calculation. The families involved are already living on very low incomes, making it impossible to pay back the accumulated sums.

Most of the working families affected are among Britain’s poorest. More than half a million of the families involved have a taxable household income of less than £20,000. Of these, 118,000 earned less than £5,000.

False Economy researcher Chaminda Jayanetti said: “Tax credit overpayments are the big scandal that no one is talking about. 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.”

Tax credits are calculated according to estimated earnings. If people earn more than they expected to, then they may only realise they have been overpaid at the end of the tax year. HMRC is usually given all the necessary information about earnings but does not always notice overestimates until the end of the year.

Dame Anne Begg, chair of the Work and Pensions Select Committee, said: “I’m very worried about the use of debt collectors because very often that means the debt has been sold on and the tactics they use to collect the debt are not tactics a government should use.

“Obviously it’s taxpayers’ money and if there’s been an overpayment then there should be efforts to recover it. But in recovering that money we shouldn’t be plunging people into poverty and it’s that sensitivity the HMRC needs to exercise.

“That’s why the Labour government put in quite a big buffer that meant your circumstances had to change a great deal for your award to change at the end of the year.”

HMRC has hired at least 12 private debt collectors to pursue tax credits, according to the FoI request. They are: Advantis Credit; Akinika Debt Recovery; Apex Credit Management; Bluestone Credit Management; CCSCollect; Sigma Red; Credit Solutions; Direct Legal & Collections; Drydensfairfax solicitors; Equita; Fredrickson International and Rossendales.

Working and child tax credits were brought in by the Labour government in 2003 to top-up low-income families. Overpayment was a major issue when they were first introduced but was brought down to a low of 1.2 million cases in 2007. Since then, however, the number and cost of overpayments has gone up every year.

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 faced being chased for overpayment debts.

In the same year, the Government announced that it would start using professional debt collectors to collect unpaid taxes. It was assumed this would be for wealthy tax avoiders, but there is evidence that they are also using them to target those on minimal incomes.

Underpayment is also a problem, with more than £1bn owed to 1.5 million families in the tax year to 2012.

Citizens Advice is expected to report today that the number of people asking for advice on tax credit debts has increased dramatically in recent years. The Government will release its latest figures on tax credit overpayment today.

The Government plans to replace the tax credits and benefit system with universal credit, but the welfare reform has been beset with delays and major computer problems.

An HMRC spokesman 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.”

He added: “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.”

CASE STUDY: ‘Tears of frustration’

Bob Farrell, 46, and his partner Claudia Vale, 42, live in Tunbridge Wells, Kent, with their children, Jake, 11, and Billy-Joe, five. They are being chased for more than £7,000 in overpaid tax credits despite declaring all their income.

I was made redundant from a recruitment firm in June 2012. I took a redundancy payment which we used for four months before the money ran out. We made an initial claim in September for working tax credits and child tax credit. Then we suddenly got a letter last year saying we‘ve recalculated and you owe us £4,300. Three months later we got another saying we owed another £3,000. When I rang they said the debt was based on the information we’d given them, but the information hadn’t changed, so I couldn’t understand.

“It’s painful, we’ve had so many conversations with HMRC and both my partner and I have been in tears of frustration. I’m working again now but I have to pay £40 a month back to HMRC, which is all we can afford. I don’t think they should be chasing these debts, we needed the money at the time – without it we would have gone under.”

CASE STUDY: Chased for debt

Julie Crooks, 29, lives in Cumnock in Ayrshire with her husband Allan, 48, and their children Blair, two, and Cameron, six

I was overpaid for about six months between 2012 and 2013, which added up to almost £4,000. I thought the amount I was getting was strange at the time and phoned up to check it was the right amount, but they said ‘no, that’s what you’re entitled to’.

“When I applied for tax credit, HMRC accidentally put me down as if we were both unemployed but my husband was working. They made the mistake even though I filled out the form saying exactly what benefit I was on.

“It’s not good having a debt hanging over you that’s no fault of your own. My husband and I were separated for a while, so there’s another debt of £390 that’s just under my name. For some reason I’m being chased by debt collectors for that.

“They phone the house a lot and sometimes they send three or four letters a week. There are a lot of threats; it’s always language saying ‘we may’ do this or ‘we may’ do that. I find it strange that [HMRC] is happy to take my tax credits for the large debt but is chasing so aggressively for the smaller one. They make it feel as if it’s you that’s done something wrong.”

Additional reporting by Jochan Embley

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