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HMRC internal manual

Tax Credits Manual

Payment - overpayments (A-C): overpayments - bankrupt or sequestrated customers

Background

In England, Wales and Northern Ireland, when a person cannot pay their debts, they may be made bankrupt. In Scotland, the same procedure is known as sequestration.

Note: The term bankruptcy will be used from this point onwards, but this will also refer to sequestration for customers who live in Scotland.

A customer may notify you that they have been declared bankrupt or you may receive correspondence about this from the Official Receiver or an Insolvency Practitioner (England, Wales or Northern Ireland) or an Accountant in Bankruptcy (Scotland).

Any tax credits overpayment will cease to be recoverable from the date a person enters bankruptcy.

If the customer is a member of a joint household then, if only one customer has been declared bankrupt, the tax credits overpayment will continue to be recovered from the other customer. This is because both members of the household are jointly and severally liable for the overpayment.

Household breakdown and reconciliation

Where a couple have a joint claim, separate and then reconcile and one of the couple is made bankrupt, work the case as at the date of bankruptcy. When working these cases (joint claim, partner solvent previous joint overpayment in Cross Award Recovery (CAR) check what household the bankrupt individual was in at the time they were declared bankrupt and if they were in a claim without their current partner remit all single overpayments and 50% of their joint overpayment (before and including tax year of bankruptcy).

For example

  • Miss A & Mr B had a joint claim and accrued a £2,000.00 overpayment.
  • They separate and Miss A makes a new single claim and during that period is made bankrupt
  • Miss A and Mr B reconcile, make a joint claim and the £2000 overpayment goes into CAR
  • CAR recovers £500.00 after they reconcile.

If the case had been worked when Miss A was made bankrupt we would remit 50% of the £2000 joint overpayment (£1000) plus any single person debt. CAR Recoveries mean an outstanding joint debt of £1500.

In this scenario we would remit £750.00 (half the outstanding debt) and repay Miss A £250.00. This would leave £750.00 to be recovered from the on-going claim.  This means that £250 goes back to Miss A which is her half of what has been collected through CAR. We remit £750 which is the remainder of her half to be included as part of the Bankruptcy claim. CAR has now collected £250 from her partner and will continue to collect £750 from her partner, equating to his half of the debt (£1000).

If there has been a household breakdown on the award or there is no continuing entitlement, then Debt Management (DM) will have to be made aware of any customers who have been made bankrupt and will be in direct contact with them.

Disputing an overpayment

Note: If a customer notifies you that they have been made bankrupt but they also dispute or require an explanation of the overpayment, you must deal with the dispute or explanation of the overpayment, you must pass the casepapers to the dispute team and ask them to deal with the dispute/explanation first and then return the casepapers to the Bankruptcy team once they have completed their action.

Unfinalised tax year

If the date of bankruptcy falls in a tax year that has not been finalised, you will need to note the ‘Unfinalised’ spreadsheet and BF the case until the case is finalised. This ensures that any overpayments arising in that tax year are included in the bankruptcy.

Depending on when the customer enters bankruptcy, there could be two years awaiting finalising. If the customer enters bankruptcy on 9 June 2016 when provisional payments are still being paid, the tax year 2015/16 will need to be finalised and any overpayment in this tax year would fall to be considered for inclusion in the bankruptcy. As the date of bankruptcy falls in the tax year 2016/17 the case will be added to the “Unfinalised spreadsheet” and if an overpayment arises when that ‘claim’ is finalised, any overpayment here would also need to be factored into the bankruptcy, subject to them having a partner.

Guidance

Checklist

Before you follow this guidance, make sure

  • you have the correct user roles to follow this guidance
  • you are in the correct MU. Use TCM0322460 for the correct MU number
  • ensure you have access to the Insolvency Claims Handling Unit (ICHU) database.

Note: When sending customer, staff or process data to another individual or team, make sure you follow the latest security guidelines or contact the Data Guardian or Data Security Team for advice.

If you are notified that a customer has been declared bankrupt, pass to the Bankruptcy team.

Step 1

Establish if the correspondence is from the customer or an authorised personal acting body. For example, the Insolvency Practitioner, County Court or the Insolvency Service.

Important note: In this guidance references to the customer refer to the bankrupt person.

If the correspondence is from the customer, go to Step 2

If the correspondence is notifiction of bankruptcy, go to Step 2

If you are dealing with a case from the’unfinalised’ spreadsheet, go to Step 24

Step 2

Has the customer provided proof of their bankruptcy?

If the customer has provided proof of their bankruptcy, go to Step 5

If the customer has not provided proof of their bankruptcy, go to Step 3

Step 3

Check the Insolvency register and also household notes for evidence of bankruptcy

If there is evidence of bankruptcy, go to Step 5

If there is no evidence of bankruptcy, go to Step 4

Step 4

Check for any outstanding overpayment. For how to do this, use TCM1000056

Check in View Household account function to see if the overpayment is being recovered by direct recovery or on an ongoing claim. For how to do this use, TCM1000199

If there is no outstanding overpayment, go to Step 6

If there is ongoing entitlement

  • send a TC880A-2 to the customer asking for evidence of bankruptcy
  • update household notes with OD71 from TCM0166020. For how to do this, use TCM1000001
  • send casepapers to storage. Follow the guidance in TCM0074140

If there is no ongoing entitlement

  • send a TC880D to advise the customer recovery is being made by Debt Management (DM)
  • update household notes with OD61 from TCM0166020. For how to do this, use TCM1000001
  • send the casepapers to storage. Follow the guidance in TCM0074140

Step 5

Check the ‘account status’ of any outstanding overpayments. For how to do this, use TCM1000199 - How to check if payments are being recovered.

Note: Work any cases in direct recovery first before cases in cross year or cross award recovery.

If there is no outstanding overpayment, go to Step 6

If there is an overpayment in direct recovery, go to Step 7

If there is an overpayment in cross year recovery, including cross award recovery (CAR), go to Step 8

Step 6

Check if the case has already been actioned. For how to do this, use TCM1000067

Note: there may be no overpayment because this has already been recovered. You may need to consider refunding any recoveries made after the date of the bankruptcy if this has not already been done.

If the case has previously been actioned

  • update household notes with OD73 from TCM0166020. For how to do this, use TCM1000001
  • send casepapers to storage. For how to do this, use TCM0074140

If there is no record of the case being actioned,

  • send the correspondence to Debt Management (DM) to check for other HMRC debts
  • update household notes with MG01 from TCM0162080. For how to do this, use TCM1000001

Step 7

If the overpayment is being recovered by direct recovery only,

  • send the correspondence manually to DM
  • update household notes with MG01 from TCM0162080. For how to do this, use TCM1000001
  • no further action

Note: Overpayments can be recovered by direct recovery and from ongoing tax credit entitlement.

If the overpayment is being recovered by direct recovery and there is also ongoing entitlement,

  • send a copy of the correspondence manually to DM
  • continue with the debts relevant to the ongoing award
  • go to Step 8.

Step 8

Check if the current award is a joint claim. For how to do this, use TCM1000129

If the claim is a joint claim, go to Step 9

If the claim is not a joint claim, go to Step 13

Step 9

Check the Insolvency register to see if the customer’s partner is bankrupt.

If the partner is bankrupt, note the date of the bankruptcy and go to Step 13

If the partner is not bankrupt, go to Step 10

Note: if there is information that suggests the partner is bankrupt but is not shown on the Insolvency register, issue TC880b to ask the partner to provide evidence of bankruptcy.

Step 10

Check if there is CAR that was originally the customer’s debt as a single person. To check if CAR applies, use TCM1000561

Note: Only debts that were exclusively the bankrupt person’s debts can be included in the bankruptcy

If there is CAR that was originally the customer’s debt as a single person, go to Step 11

If there is no CAR that was originally the customer’s debt as a single person, go to Step 12

Step 11

Check if the debt can be included in the bankruptcy. Include any outstanding debts that are before the bankruptcy date and any in the tax year of the bankruptcy. If the tax year including the bankruptcy has not been finalised this cannot be included at this stage.

If the debt can be included, go to Step 14

If the debt cannot be included, go to Step 12

Step 12

The debt is recoverable by the person who is not bankrupt,

  • issue TC880B
  • update household notes with OD62 from TCM0166020. For how to do this, use TCM1000001
  • send casepapers to storage. For how to do this, use TCM0074140

Step 13

Check for any CAR. To check if CAR applies, use TCM1000561

Check if the outstanding overpayments are from a single or joint award. Only outstanding overpayments can be included where

  • the overpayment belongs wholly to the bankrupt person in a single person claim or
  • if both customer and partner are bankrupt any overpayments from their joint claim.

For example, Jack and Jill have an ongoing joint claim from 2012. They have a joint overpayment of £1000 from 2014/15. Jack has two overpayments of £500 and £300 from his single claim before 2012. Both overpayments have been transferred to CAR.

Jack is made bankrupt on 07/07/2015. The only overpayments to be included in the bankruptcy are his two single outstanding overpayments. The overpayment from the joint claim is recoverable from his partner, Jill.

Step 14

Check what debts can be included in the bankruptcy

Note: where you need to make a change or apply a remission to a tax year and the relevant claim for that tax year has an overpayment that has been transferred to an ongoing claim for CAR, you must transfer the overpayment back to its original tax year before you apply any changes or try to remit the debt.

If the tax year you are going to take action on is CY to CY-5

  • enter an Appeal Marker on the original claim for the tax year from where the debt originated. For how to do this, use TCM1000444
  • update household notes with ON19 from TCM0166040. For how to do this, use TCM1000001
  • wait 24 hours to allow the debt to transfer back (check postings to ensure the debt has gone back to the original claim)
  • go to Step 15

If the tax year you are going to take action on is CY-6 or earlier

  • enter an overpayment suspension marker on the ongoing claim for the tax year that the debt has been transferred. For how to do this use TCM1000335
  • update household notes with ON19 from TCM0166020. For how to do this, use TCM1000001
  • BF for 5 working days to allow the debt to transfer back (check postings to ensure the debt has gone back to the original claim)
  • apply the changes/remission to the original claim
  • go to Step 15
    Note: remember to remove any appeal and suspension markers once CAR payments have been returnedFor how to do this, use TCM1000336 ‘How to remove a Manual Suspension marker’ or TCM1000453 ‘How to close an appeal’.

Step 15

Check for cross year recovery, for how to do this, use TCM1000522

If cross year recovery does not apply, go to Step 16

If cross year recovery applies

  • consider debts to be included in bankruptcy. These are all outstanding debts before the date of the bankruptcy and include the tax year of the bankruptcy.
    Note: where both partners in a joint claim are bankrupt, use the latest (most recent) bankruptcy date.
    Example A couple only have a joint overpayment of £900, when App1 is made bankrupt on 01 December 2015; App2 is responsible for repaying the debt. When App 2 is made bankrupt on 14 March 2016 the outstanding overpayment (which is now £750) is remitted.
  • If the tax year of the bankruptcy has not been finalised you cannot include this debt in the bankruptcy at this stage. Make a note on the ‘Unfinalised’ database
    Note: If the only outstanding overpayment is in the tax year of the bankruptcy and this hasn’t been finalised, update the ‘Unfinalised’ database and send casepapers to storage. If the tax year of the bankruptcy has not been finalised you cannot include this debt in the bankruptcy at this stage. Make a note on the ‘Unfinalised’ database.
  • go to Step 16

Step 16

Consider any debts that cannot be included. For example, any debts after the tax year of the bankruptcy.

If all debts are to be included and any recovery includes cross year recovery

If all debts are to be included and the recovery is only via CAR

If there is no debt to include in the bankruptcy,

  • issue TC880c selecting the relevant paragraph
  • update household notes with OD63 from TCM0166020. For how to do this, use TCM1000001
  • go to Step 19

If some but not all debts are to be included

  • make a note of the debts not to be included
  • go to Step 17

Step 17

Take the following actions

  • manually suspend the relevant recovery. For how to do this, use TCM1000335
  • update household notes with ON23, for how to do this, use TCM1000001
  • BF for the system for up to 5 days to update the suspension
  • go to Step 18

Step 18

Open bankruptcy worksheet, and enter following details

  • name
  • NINO
  • the date of the bankruptcy order
  • partner’s name if they are bankrupt
  • whether the recovery is cross year recovery or cross award recovery
  • enter any debts to be included in the bankruptcy in the relevant tax credit
  • go to Step 19

Step 19

Check if there are recoveries made on or after the date of the Bankruptcy order.

To do this check the Payment Schedule screen noting any recoveries in the ‘Amount recovered’ field for dates after the date of the bankruptcy. Use the ‘issued’ date and not the ‘due’ date. Also check the View Award Period summary screen.

Note: you may need to check payments-in and set-offs in the postings screen made on or after the date of bankruptcy

Note: Any recoveries made to reduce an overpayment that arose after the tax year of the bankruptcy cannot be repaid.

If there are recoveries to repay to the customer,

  • update the worksheet with details of recoveries
  • go to Step 20

If there are no recoveries to repay, go to Step 20

Step 20 {#}

Send the worksheet with amounts to remit and /or repay to the authorising officer and include screen prints of outstanding overpayments and any recoveries made.

When the authorising officer returns the casepapers, go to Step 21

Step 21

When the casespapers are returned to you

  • remove any appeal or manual suspension markers. For how to do this, use TCM1000336 ‘How to remove a Manual Suspension marker’ or TCM1000453 ‘How to close an appeal’
    Note: if removing an appeal marker change the ‘Appeal status’ field to ‘Closed clerical error’
  • remit the overpayment(s). For how to do this, follow TCM02330060. Remit any CAR debts as Class 2 and cross-year debts as Class 5b
  • update the remissions database
  • go to Step 22

Step 22

If there are no recoveries to repay, go to Step 23

If there are recoveries to repay

  • send a manual repayment request, to the manual payments team
  • use the Manual Payment Referral form in SEES, to repay any recoveries shown as ‘total B’ on the worksheet 
  • print a copy of the referral form and retain in casepapers
  • go to Step 23

Step 23

Take the following actions

  • delete household note ON19, if appropriate
  • enter household note OD68 and/or OD63 from TCM0166020. For how to do this, use TCM1000001
  • update the ‘Unfinalised’ spreadsheet
  • remove suspensions/appeal markers if not already done. For how to do this see TCM1000336 ‘How to remove a Manual Suspension marker’ or TCM1000453 ‘How to close an appeal’
  • update the Insolvency Claims Handling Unit (ICHU) database
  • send TC880c letter to customer. Remember to include all overpayments you have made a decision on, selecting the relevant letter paragraphs
  • complete MS164. For how to do this, use TCM1000292
  • prepare and send casepapers to storage. For how to do this, use TCM0074140
  • no further action

Step 24

Select case from ‘Unfinalised’ spreadsheet (after 31 July).

Check if the award in the tax year including the date of the bankruptcy has been finalised or terminated.

Note: A finalised award will have an award type of ‘Final Act’, ‘Final As Act’ or ‘Final Man’. An award type of ‘Final Est’ does not count as a finalised award for a bankruptcy case.

Note: Where the customer has submitted more than one claim and there is not a finalised award or SOA on the latest claim, you must check the previous claims.

If the award has been finalised or terminated, go to Step 25

If the award has not been finalised or terminated

  • leave the entry on the Unfinalised spreadsheet
  • BF to a later date (if appropriate)
  • no further action

Step 25

Check if there is an overpayment for the finalised or terminated award

If there is an overpayment, go to Step 18

If there is no overpayment, go to Step 26

Step 26

Check for any recoveries after the date of the bankruptcy for an overpayment that occurred in the tax year of the bankruptcy.

If there are recoveries after the date of the bankruptcy, go to Step 18

If there are no recoveries after the date of the bankruptcy for an overpayment that occurred in the tax year of the bankruptcy,

  • remove the entry from the ‘Unfinalised’ spreadsheet
  • take no further action.