By Chaminda Jayanetti
People switching from tax credits to Universal Credit could be hit with new debts due to the move, the Department for Work and Pensions has admitted.
Tax credits are among the benefits being replaced by Universal Credit, but moving people from one benefit to the other is a complex process.
This is because tax credits are paid by HMRC, while Universal Credit is paid by the DWP – a completely different department of government.
In official guidance published last week with little fanfare, the DWP said: “HMRC will continue to make tax credit payments until they receive a stop notice from DWP, which is automatically sent when entitlement for Universal Credit is established.
“The move to Universal Credit could create a tax credit overpayment which the claimant will have to pay back as well as any other tax credit overpayments they may have.”
In other words, HMRC will not be told to stop paying tax credits until after the DWP has already begun paying Universal Credit.
As the two benefits are not supposed to be paid to a claimant at the same time – with Universal Credit replacing tax credits – this means the claimant will end up with a tax credit overpayment which has to be repaid.
However, because tax credit payments often fluctuate during the year, the claimant – who is likely to be on a low income – may not realise they have been overpaid, and might have spent that money in the meantime on living costs and childcare.
In that case, the DWP will cut that person’s ongoing Universal Credit payments in order to recoup the overpaid money.
As a result, the claimant – most likely to be someone on a low income with children to raise – will effectively have their benefit cut for a period of time until the “debt” is paid off.
The full impact of what is a systemic flaw is unknown – much depends on how efficiently HMRC and the DWP’s notoriously bungling bureaucracies handle the changeover.
If DWP notifies HMRC immediately when a claimant switches from tax credits to Universal Credit, and if HMRC then immediately stops paying out tax credits, the impact will be minimal.
If, however, the two government departments revert to type and fail to act promptly, the delay could be longer, creating individual debts of hundreds of pounds.
The change took effect from April 6th. While the roll-out of Universal Credit has been heavily delayed and mostly focused on people claiming Jobseekers Allowance rather than tax credits, tens of thousands of people will move on to Universal Credit over the course of the next twelve months – with all of those moving over from tax credits apparently at risk of being landed with a state-created debt.
Overpayments have dogged the tax credit system ever since it was launched in its current form in 2003. In 2013/14, the most recent year for which figures are available, 1.7 million tax credit claims were hit with overpayments, largely caused by fluctuating incomes. Of these, half a million were overpaid by more than £1,000, meaning a four-figure debt to be repaid.